Featured Partner Offer
1
eToro
All your investments in one place
Join 30M users and explore stocks and ETFs
1
eToro
On eToro’s Website
Your capital is at risk
FEATURED PARTNER OFFER
Barclays plc (BARC)
Share price
£1.44
Market cap
£22 billion
5-year total return
-9%
Share price
£1.44
Market cap
£22 billion
5-year total return
-9%
Why We Picked It
Barclays is a global provider of retail, corporate and investment banking services. The company is headquartered in the UK and listed on the London and New York stock exchanges.
Mr Laidler says: “Barclays is the second-largest UK bank, but still has a large overseas business and sizeable investment banking arm. Last year it generated two-thirds of profits from overseas and over half from its investment banking activities.”
However, the company’s share price has been on a downward trajectory since its five-year high of more than 200 pence in early 2022.
As with its banking peers, higher interest rates have proved a double-edged sword for the company’s earnings. Rising interest rates have boosted profits from its credit card business, through Barclaycard in the UK and own-branded and co-branded credit cards in the US and Germany.
On the downside, the company has increased its provision for defaults on loans and mortgages, and faces the challenge of customers moving money from current accounts in search of higher interest rates. Investment banking activity also remains subdued against a challenging economic backdrop.
That said, Barclays is trading at its lowest valuation in some time, which some investors may view as a potential buying opportunity, along with an attractive dividend yield of around 5%.
Looking forward, Mr Laidler says: “This business is set to benefit from the broad recovery in capital markets activity as the stock markets have recovered strongly this year, global interest rates are just beginning to be cut and the cycle of initial public offerings (IPO) is showing early signs of life.”
FEATURED PARTNER OFFER
Credit Agricole SA (ACA)
Share price
£11.35
Market cap
£34 billion
5-year total return
26%
Share price
£11.35
Market cap
£34 billion
5-year total return
26%
Why We Picked It
Credit Agricole is a provider of retail, corporate and investment banking services in France, Italy and global markets.
The company is headquartered in France and listed on the Euronext Paris stock exchange. Around 60% of the company is owned by the investment vehicle of the regional banks in France.
Credit Agricole is one of the largest retail banks in France and among the top 10 global banks by revenue. The insurance division accounts for around 60% of earnings, followed by asset management and wealth management.
Mr Laidler says: “Profits are growing by 25%, per its latest quarterly report, as it benefits from higher interest rates, a diversified business model and high market shares across retail, asset management and investment banking.
“This is allowing it to pay among the global sector’s highest dividend yield at 9% and is driving its owners’ plans to further boost their ownership stake to 65%.”
Credit Agricole has delivered the second-highest five-year return among this group, together with a one-year return of nearly 30%.
In terms of outlook, earnings have been hampered by French legislation to cap the rate of interest rate increases and caps on mortgage rates. This has resulted in French banks lagging their peers who have benefitted from windfall profits from the rapid rise in interest rates in the eurozone.
However, the company’s wealth management services should be boosted by its recent €1.5 billion acquisition of Belgian wealth management firm Degroof Petercam.
FEATURED PARTNER OFFER
HSBC Holdings plc (HSBA)
Share price
£5.84
Market cap
£115 billion
5-year total return
4%
Share price
£5.84
Market cap
£115 billion
5-year total return
4%
Why We Picked It
HSBC is a global provider of retail, corporate and investment banking services. The company is headquartered in the UK and listed on the London, New York, Bermuda and Hong Kong stock exchanges.
HSBC has a strong presence in higher-growth markets in Asia, which now account for more than half of group earnings. The company is also in the process of selling its operations in the US, Canada and France to reposition its portfolio towards more profitable markets.
Mr Laidler says: “HSBC is the UK’s largest bank and one of the top-performing banks globally this year. The second quarter results saw it beat expectations and raise guidance as it more than doubled profits, benefiting from higher interest rates, cost cutting and Asian growth.”
As a result, the company’s share price has risen by more than 10% this year and it currently offers a dividend yield of almost 6%. Investors were also buoyed by news of substantial share buybacks as HSBC looks to return excess funds to shareholders.
However, the company continues to face risks from loan defaults, with particular concerns over its exposure to the Chinese commercial real estate market. As with the wider sector, cost management also remains a challenge in a high inflationary environment.
HSBC may appeal to investors looking for a large-cap bank stock with Asian exposure. Mr Laidler also points to HSBC trading on a lower price-earnings ratio (of 6 times) and higher dividend yield than its peer Standard Chartered.
FEATURED PARTNER OFFER
NatWest Group plc (NWG)
Share price
£2.25
Market cap
£20 billion
5-year total return
22%
Share price
£2.25
Market cap
£20 billion
5-year total return
22%
Why We Picked It
NatWest is a UK-centric provider of retail and corporate banking services, with brands including the Royal Bank of Scotland (RBS), Ulster Bank and Coutts (for high net-worth individuals). The company is headquartered in the UK and listed on the London Stock Exchange.
NatWest is one of the largest mortgage providers in the UK and generates the majority of its profits from the interest margin between deposits and lending.
The company also has a lower-risk loan portfolio than some of its peers, with a smaller proportion of higher-risk unsecured lending and an average loan-to-value ratio of 55% for its mortgages.
However, negative publicity over the closure of Nigel Farage’s account at Coutts has taken its toll on the company’s share price over the last few months. Question marks were raised as to whether this decision was commercially motivated or due to other factors, leading to the resignation of CEO Alison Rose.
Mr Laidler says: “NatWest is the smallest of the UK’s ‘big four’ high street lenders and the worst-performing this year.
“Despite its strong exposure to the lacklustre UK economy, weakening mortgage market and higher deposit rate headwinds, it is still posting double-digit profitability levels, has the cheapest price-earnings valuation (at 5 times) and the highest dividend yield (at 6.5%).”
In terms of the outlook, he adds: “It’s a keenly-priced contrarian play on a ‘less-bad’ outlook for the UK as inflation gradually falls and the economy sidesteps recession.”
FEATURED PARTNER OFFER
UniCredit SpA (UCG)
Share price
£21.87
Market cap
£42 billion
5-year total return
80%
Share price
£21.87
Market cap
£42 billion
5-year total return
80%
Why We Picked It
UniCredit is a European provider of retail, corporate and investment banking services. The company is headquartered in Italy and listed on the Milan, Frankfurt and Warsaw stock exchanges.
Although UniCredit is the second-largest bank in Italy, it generates more than half of its profits from its international operations, including Germany and central and eastern Europe. However, it has attracted some criticism for having yet to dispose of its operations in Russia.
Mr Laidler says: “UniCredit is among the best performing banks globally this year, with its share price up by more than 60%. It is benefiting from higher European interest rates, an accelerating and deep cost-cutting programme and improved loan lending standards.
“Recent profits beat forecasts, rising 25% versus last year, and saw management raise guidance, as it bolsters its digitalisation plan.”
The company boasts the highest returns of our group over the last three years by some margin, rewarding shareholders with a total return of 130%.
Mr Laidler adds: “Despite the rally, it remains on a below average price-earnings valuation of six times with a 4% dividend yield.”
What are advantages of investing in bank stocks?
One of the key advantages of investing in the banking sector is its position as the one of the largest stock market sectors globally by market capitalisation, second only to the technology sector. Financial services are also the cornerstone of many economies, including in the UK and US.
Some investors may also be attracted by the current valuations of bank stocks relative to other sectors.
Mr Laidler says: “Financials have dramatically lagged this year, rising by only 5% versus the 15% rebound in global equities and the 40% surge for big tech stocks. US banks have borne the brunt of this, triggered by the bankruptcy of Silicon Valley Bank, whilst European banks have weathered the storm well and outperformed.
“Only airlines are cheaper than banks among all global industries, with their price-earnings ratio of 8 less than a third of tech’s 26 times, while the sector’s dividend yield stands at over 4%.”
High interest rates have also boosted profitability, with many banks reporting an increase in their net interest margin over the past year. In its simplest form, this measures the amount of interest that a bank earns from its loans relative to the interest paid on deposits.
Many bank stocks are also large-cap companies, typically with the financial firepower to weather a recession. Added to this, large-cap stocks are typically less volatile than their smaller-cap counterparts, which may be attractive in times of market uncertainty.
Banking is also a highly-regulated industry, with requirements to maintain minimum capital levels. A diversified portfolio of commercial and investment banking operations also spreads the risk of one part of the business underperforming.
What are risks of investing in bank stocks?
The main risk of investing in bank stocks is the risk of failure. This was evident during the global financial crisis with the collapse of Lehman Brothers in the US and the government bail-out of RBS and Lloyds in the UK.
More recent casualties include Credit Suisse and Silicon Valley Bank (SVB). The plight of SVB highlighted the risk that widespread panic can ‘bring down’ a bank. Fears over the bank’s viability triggered a downward spiral with SVB having to sell assets at heavy losses to cover mass withdrawals by customers.
Mr Laidler says: “Banks may be cheap for a reason with March’s US banks scare acting as a sharp reminder of how quickly things can sometimes go wrong, underlying the inherent vulnerabilities of a business model using short-term deposits to fund long-term lending.”
While, in theory, banks have the potential to make higher profits when interest rates rise, higher rates also increase the risk of defaults on loans. Consumers may also be less willing to borrow money during an economic downturn.
There is also a risk of higher regulation, including on minimum capital requirements to safeguard against another banking crisis.
French regulators have introduced a cap on borrowing rate increases, while the Italian government recently announced a windfall tax on banks (although this was subsequently watered down after it wiped £8 billion off the value of Italian banks).
Featured Partner
1
eToro
All your investments in one place
Join 30M users and explore stocks and ETFs
1
eToro
On eToro’s Website
Your capital is at risk
Frequently Asked Questions (FAQs)
How can investors buy bank shares?
Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
One of the most popular ways to buy shares is via an online trading platform. Shares can be bought using a general trading account, or a tax-efficient wrapper such as an individual savings account (ISA).
It’s worth comparing the fees charged by the platform, as these can vary significantly. We’ve compared the fees, along with other information, in our picks of the best trading platforms and best stocks and shares ISA providers.
How can investors buy non-UK shares?
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin.
Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
Most trading platforms offer the option to buy non-UK shares, such as those featured in this article. However, investors will generally be charged a foreign exchange fee of around 0.5% to 1.0% of the value of the purchase, along with a higher trading fee on non-UK shares.
Holding non-UK shares also carries foreign exchange risk. For example, if the pound strengthens against the euro, euro-denominated shares will be worth less in their sterling equivalent.
What are other options for investing in bank stocks?
Funds are a low-cost way of investing in a ready-made portfolio of assets including equities, bonds and commodities.
Funds pool money from investors to be invested by a fund manager, and are split into with two main types:
- Actively-managed funds: these aim to ‘beat the market’ by stock-picking and therefore charge a higher annual management fee (typically around 0.5% to 1.0%, compared to 0.1% to 0.2% for a passive fund).
- Passively-managed funds: also known as tracker or index funds, these replicate the composition of an index and are a lower-cost option.
There are a growing number of options for investing in bank funds. Some funds focus on companies engaged in banking services, while others invest across the financial services sector as a whole.
Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circ*mstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.
Forbes adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by ourpartners.
