FTSE 100 bank stocks pay some of the most generous dividends on the index, and they’re cheap, too. They could be even cheaper if the banking crisis flares up again.
Any investor who thought the crisis was done and dusted, following the collapse of Silicon Valley Bank and Signature Bank in the US, and Credit Suisse in Switzerland, may be thinking again after yesterday’s events.
This isn’t over yet
Shares in mid-sized regional US operator First Republic Bank have plunged to an all-time low after it revealed customers withdrew $100bn US worth of deposits in Q1.
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First Republic may have little to do with Barclays, Lloyds Banking Group, NatWest Group and HSBC Holdings, but contagion remains a constant worry. The problem with a banking run is that once it starts, it’s hard to stop.
Also, investors can never say for sure whether there are hidden problems lurking in any bank’s balance sheet, that might suddenly blow up. In the white heat of a banking run, banks and politicians can make rash decisions too. Remember how Prime Minister Gordon Brown encouraged Lloyds TSB to buy HBOS in 2008? That didn’t end well.
Barclays shares were hit hardest by last month’s panic, as it still has sizeable US investment banking operations. Shares in all the big four banks have fallen over the past three months, but Barclays fell furthest, almost 20%. They’re up 7.61% over one year though.
I bought shares in Lloyds last November, as I considered them cheap at less than 50p. My motivation was simple. To buy into its high and rising dividend yield, which I will reinvest for growth while I’m working, and take as income when I retire.
Today, Lloyds yields 4.9%, covered three times by earnings. The forecast yield is 5.8%, with cover of 2.7. While dividends are never guaranteed, I hope they’ll increase steadily over time.
There’s a buying opportunity today
Lloyds is still cheap trading at 6.6 times earnings and I’d like to buy more. Yet I’d also like to diversify into Barclays and HSBC, which offer more potential excitement via their international exposure.
If the banking crisis does return with full force, it might throw up a once-in-a-decade buying opportunity. If it does, I’ll take full advantage. Yet I’m not sure I need to wait for it. Barclays is already dirt cheap, trading at just five times earnings. The forecast yield is 5.6%, with cover of 3.7.
I wouldn’t bank on the HSBC share price falling in another crisis. It was largely unmoved by the last one, as investors decided it had the financial strength to see it through.
HSBC isn’t as cheap as Barclays, trading at 9.5 times earnings, but it isn’t expensive either, and it yields a well-covered 4.5%. Its share price is up 20.65% in the last year, the best of the big four.
While a sudden resurgence of the banking crisis might make FTSE 100 banks cheaper, it may never happen. Either way, they offer an attractive buying opportunity today.
Naturally, there are risks. Banking stocks can collapse in a crisis and take years to recover, as investors know to their cost. I’d only buy with a minimum a 10-year view. The potential rewards are worth it.
