The UK’s flagship index hit an all-time high last month. However, the Footsie has since dropped by more than 5% as fears of a repeat of the global financial crisis loom. Nonetheless, here’s why such fears are overblown and why this could be an opportunity to buy FTSE 100 bank stocks at a discount.
Why is the FTSE 100 down?
Aside from the nerves surrounding Jeremy Hunt’s spring budget, investors have been panicking over the recent administrations of a number of US banks, namely Silicon Valley Bank (SVB).
Fears surrounding the company’s liquidity had spread across Silicon Valley, leading to a bank run. In the span of a week, the California-based bank had liquidated all its assets. Since then, the company has ceased trading.
To make matters worse, Silvergate Capital and Signature Bank also collapsed in the panic caused by SVB. The fall of a one bank often sets a domino effect in motion.
As such, it’s no surprise to see the fears from the US ripple across the Atlantic, affecting FTSE 100 bank stocks too. The likes of Lloyds, Barclays, and NatWest have seen their shares drop since Thursday as investors fear a contagion event.
Is there reason to panic?
Despite the events across the pond, there isn’t much reason to panic for the UK’s financial institutions, at least for the time being. This is because they have a much less risky deposit base. In other words, the likelihood of a liquidity crisis is much lower.
One of the main reasons for this is that the more established British banks have a higher proportion of their deposits from retail customers. This means that even if a bank run were to occur, it would be more manageable, given the higher numbers of customers with smaller individual deposits. Furthermore, customer funds of up to £85k per account are insured in the UK.
Secondly, the FTSE 100 stalwarts have much lower risk-weighted assets. This is crucial because it means that UK lenders have more certainty and access to their capital. This could provide ample liquidity without incurring big losses. SVB, in contrast, had to sell long-dated government bonds at a big loss.
It’s for the above reasons that brokers from Citi, JP Morgan, and Liberium have all come out to quash fears of a banking sector collapse, especially in Europe.
Should I buy Footsie bank stocks?
It goes without saying that investing in bank stocks is a risky affair. Thus, finding a firm with a solid balance sheet with low risk exposure is crucial. And having assessed the fundamentals of FTSE 100 banks, the risk-reward proposition is certainly lucrative given the recent drop in their share prices.
On aggregate, most of them are trading on rather lucrative valuation multiples when compared to the industry’s average. Hence, it’s worth considering starting a position in one or even some of them. In fact, I’m planning to buy more Lloyds shares to capitalise on the current weakness and lucrative dividend.
|Price-to-book (P/B) ratio||0.7||0.3||0.7||0.7||0.6||0.7|
|Price-to-earnings (P/E) ratio||6.6||4.7||7.3||9.2||6.1||9.5|
|Forward price-to-earnings (FP/E) ratio||6.9||4.9||6.2||5.6||5.8||8.0|
The post FTSE 100: keep calm and buy cheap bank stocks appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. SVB Financial provides credit and banking services to The Motley Fool. Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.