Once a staple of mainstream investors’ portfolios, the FTSE’s big banks don’t get much love these days.
Even before Covid, banking stocks still struggled with the lingering effects of the 2008 financial crash, along with Brexit uncertainty. As a result, banks emerged as one of the worst performing sectors of the FTSE 100 over the past decade.
But could their fortunes change? Better-than-expected economic data is finally starting to breathe life into the major banks.
Better-than-expected economic data is beginning to show signs of life for the major banks, with Lloyds and NatWest rising 30 percent and 28 percent since January, and Barclays up 15 percent
Lloyds and NatWest are up 27 percent and 21 percent since January, while Barclays is up 13 percent.
And the news that the banks will return to paying dividends will be a welcome relief to those seeking a regular income.
So this unloved sector can boost your portfolio? Or should investors be wary?
Valued at over £200 billion, banks make up a large part of the FTSE 100 – accounting for more than 10 percent of its total market capitalization.
Asian giant HSBC leads the pack, with domestic-focused Lloyds not far behind.
Shareholders would typically receive a return of around 5 percent, with banks sometimes accounting for 25 percent of all FTSE dividends.
In recent years, banks have had to contend with a more difficult economic environment, as low interest rates have made loans less profitable.
When Covid hit, banking stocks were hit hard, with HSBC and Barclays both losing 50 percent of their value in six months.
While most other sectors have recouped their losses (bringing the FTSE All Share within 8 percent of its pre-Covid peak), banks have lagged.
Their dividends were also cut when the Bank of England stepped in to impose a temporary cap on payouts.
The idea was to ensure that banks would have the necessary capital to weather the Covid crisis.
Last week, Threadneedle Street confirmed that full dividends may resume. Healthy balance sheets mean the big five (HSBC, NatWest, Lloyds, Standard Chartered and Barclays) should pay out more than 3 percent this year.
Those payments are then expected to rise in the coming years, to a staggering 6.7 percent for HSBC and 5.3 percent for Barclays by 2023.
As you might expect, bank stocks are certainly not without risk. While stock prices have responded well to positive economic data (particularly on the Covid recovery), not all signs are so good.
Ultra-low interest rates show no signs of disappearing. Like many other parts of the equity markets, banks remain sensitive to signs of resurgence in inflation, especially in the US. And while mortgage lending has been healthy, the housing market still faces uncertainty.
In addition, High Street banks are being pressured by new competitors, including ‘fintech’ companies.
Last week, digital banking company Revolut became Britain’s most valued private technology company – valued at £24 billion.
Started as a bold start-up in 2015, it is applying for a full banking license. Its backers hope Revolut can capture a long-term share of the banking market – at the expense of more established players.
How to invest?
With these factors in mind, bank stocks still seem undervalued. But as with any investment decision, buyers should be sure to do their homework first.
And income investors aren’t the only industry paying dividends. The FTSE 100 should release £76.9 billion in dividends this year, with Rio Tinto, British American Tobacco and investors M&G all paying more than 7 percent.
As always, it is also worth looking at mutual funds. This allows you to follow a particular investment strategy without having to select stocks yourself.
Standard Chartered, Lloyds and Barclays are all included in Schroders’ popular Recovery Fund, which seeks undervalued assets from across the FTSE.
An amount of £10,000 invested five years ago would now be worth £12,400.
Income funds, meanwhile, focus on dividend-paying assets and passing on those profits.
River & Mercantile’s UK Recovery fund supports Barclays, Lloyds and HSBC, plus Shell and BP. An investment of £10,000 five years ago would have grown to £15,900.
If the dividend predictions turn out to be correct, this could become a strong portfolio choice.
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