Are any British bank stocks cheap and should investors buy in? Experts give their verdict
It's safe to say Britain's banking sector is booming.
February saw banking institutions release annual results, with lenders reporting their biggest ever cash return in 2024, with combined pre-tax profits hitting £50.3billion.
Profits at NatWest were up 100 per cent in the past year, Standard Chartered up 95 per cent and Barclays 79 per cent.
Lloyds and HSBC also saw profits rise 54 per cent and 51 per cent respectively in the past 12 months.
The biggest riser, NatWest, raked in £6.2billion in pre-tax profit, ahead of the £6.1billion forecast for the FTSE 100-listed lender.
The bank gained 500,000 new customers last year, as its chief executive, Paul Thwaite, said it could shift to full private ownership in 2025.
The Government currently holds an 3.95 per cent stake in the bank after rescuing it from the effects of the financial crisis in 2008.
On the rise: UK lenders have seen strong growth over the past 12 months
Standard Chartered saw pre-tax profits increase by $6billion, up 18 per cent from a year ago - it is headquartered in Britain, although it has no UK retail presence and most of its profits come from overseas.
Barclays saw its own profit increase by 24 per cent to £8.1billion. In the fourth quarter, Barclays saw its profit rise to £1.7billion from just £110million a year ago.
The UK's largest bank, HSBC, saw its pre-tax profit increase to £25.6billion in 2024, from a previous £23.1billion. The bank is hoping to slash £1.2billion in costs by the end of 2026.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: 'Barclays and HSBC stood out this quarter, posting strong top-line growth thanks to their investment banking arms - a pattern echoed through the big US banks not too long ago.
'HSBC, alongside other Asia-focused players, also got a lift from wealth management, tapping into a sweet spot in the region that's ripe for more growth as Asia's wealth continues to climb.'
Lloyds, on the other hand, saw profit decline 20 per cent to just under £6billion, below consensus, after the bank earmarked £700million for potential remediation costs related to the motor finance scandal.
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Payouts for shareholders
With banks earning record profits in 2024, the sector also saw lenders return some £35billion to shareholders in the form of dividends and share buybacks.
AJ Bell investment director, Russ Mould, said: 'The FTSE 100's Big Five banks are running like cash machines right now, in terms of how much they earn and how much they are returning to their shareholders.'
Chief among these payouts was Standard Chartered's announcement of a $1.5billion share buyback, as well as a 28 pence per share final dividend, bringing its total investor payouts to $4.9billion since its last full year results.
'Such largesse may be enough to keep investors interested in the banks, even after their stunning run over the past 12 months.'
HSBC plans to launch a $2billion buyback, while NatWest beat analyst forecasts with a full year dividend of 21.5p per share.
Jason Hollands, managing director of Bestinvest, said: '[Natwest] has also been on an acquisition spree, with deals to acquire the mortgage book of Metro Bank and most of Sainsbury's Bank, which are signs of renewed confidence.
'We also like NatWest's strong commitment to return capital to shareholders by way of dividends and share buybacks.'
Barclays paid out 5.5p per share and launched a £1billion share buyback.
Lloyds upped its own full year dividend by 15 per cent to 3.17p per share, and will launch a share buyback programme of up to £1.7billion.
Tailwinds vs headwinds
'Sentiment is up,' Britzman says, after a strong 2024 for banks. He added: 'for good reason - fears from early 2024 about borrowers buckling under pressure didn't play out as expected.'
In 2024, much of the strength of banks can be attributed to the benefits of the banks' use of a structural hedge.
A structural hedge essentially allows banks to lock in interest rate income to smooth the effect of falling interest rates.
With rates expected to fall further in 2025, potentially to 4 per cent by the end of the year, banks could be set to see further benefits from their use of structural hedges.
In fact, Britzman says the structural hedge could 'quietly [boost] income not just next year but out to 2026 and 2027.'
He added: 'Several factors underpin a constructive outlook for the sector, even after 2024's rally captured a portion of the upside.
'Defaults are holding steady at low levels, with room to edge up without raising red flags.
'The mortgage market's headwinds are starting to fade, and if interest rates ease a bit more, loan demand could pick up.
'It's not a runaway rally, the UK economic picture is cloudy and most of the banks issued guidance that seemed a little cautious.
'But looking at the setup, and adding in healthy capital levels across the sector, there's a solid foundation here to support returns over the coming year.'
AJ Bell's Mould agrees. He said: 'Encouraged by ongoing cost-efficiency programmes, the absence of an economic downturn, modest loan losses and buoyant financial markets, analysts now expect further modest increases in 2025 and 2026.'
There are still concerns, of course.
The FCA's motor finance probe is no doubt the source of multiple headaches for bank bosses.
Alongside the £700million pot Lloyds has set aside, Barclays has kept back some £90million, but RBC Capital Markets says the lender could end up shelling out some £250million.
In fact, some analysts expect UK banks could be forced to pay billions in compensation.
Even despite this, the picture is one of relative positivity.
Mould said: 'The banks continue to generate healthy returns on equity, so they are throwing out plenty of surplus cash, even once they pay their bills, invest in their competitive position and keep regulators sweet by meeting, or exceeding, their regulatory capital requirements.'
Are banks still cheap?
The recent gains come off the back of weaker performance that has plagued the sector in recent years, with banks having slipped to their most recent lows amid the pandemic.
Hollands said: 'Banks have been on a roll – and not just the UK banks, making terrific share price gains over the last 12-months, in some cases akin to the returns associated with the so-called US Magnificent Seven mega cap tech stocks.'
Mould, though, says: 'That strong run does mean the banks are no longer as cheap as they were.
'The dividend yields, and total cash yield including buybacks, may still be attractive, but their valuations on the basis of historic net asset, or book, value are now less eye-catching.'
However, despite their strong returns, banks are still facing low valuations, even if their shares don't offer the same value proposition they once did.
Indeed, Hollands said: 'The gains have been made off a low base mind you (unlike the eye watering valuations of the Magnificent Seven), as valuations were rock bottom in the aftermath of the mini-banking crisis that began with the collapse of Silicon Valley Bank in early 2023 as the value of its bond holdings tumbled in response to rate hikes.
Of the UK's big five banks, all have PE ratios below 10, with the highest, Lloyds, coming in at 9.6. A lower ratio can indicate that investors are pessimistic about the future of a company.
However, it can also mean that a stock is undervalued, with a low share price despite earnings remaining stable.
A low PE ratio is typically one that is below 10. A year ago, the average PE ratio was almost as low as five for UK domestic banks, according to Numis data.
This means that these stocks could have potential for strong growth in the future.
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