Sector spotlight: banks

Can investors still bank on banks?

Article updated: 1 July 2020 8:00am Author: Michael Baxter

If you look at the share prices in isolation, then most banks have seen a poor performance and in some cases, shockingly poor. Their saving grace has been the dividend yield.

What I find especially interesting, is how, in some cases, shares prices picked up in the aftermath of 2008. Too easily do we forget. Immediately after the banking bailout, there was a view that bank shares were at a bargain price. There was even a view that governments had acquired shares so cheaply that ten years or so later they would be able to sell their shares at a massive profit.

Those expectations were dashed.

So let’s drill down. I am looking at Banco Santander, Barclays, HSBC, Lloyds, RBS, and Standard Charterred.

Banco Santander 

It’s the whopping dividend yield that many investors find attractive and I'm not sure I blame them.

Is Banco Santander a good investment? The shares are less important than the dividend but is this safe?

The latest results have earnings per share at three times dividend per share.

However, I'm not so keen on the balance sheet. If its loans start going bad, then the dividends may have to fall,  maybe by quite a lot. On the other hand, dividend cover is 4.68, so there is some slack.

Period Share price (approx)
Current share price 192p (26 June) 
2020 high 333p
12-month high 384p
Five-year high 524p (2018)
Ten-year high 808p (2010)
20 year high 1,100p (2008)
Market cap £31bn
Yield 9% 
P/E 6.2
All time high 1,036p

Barclays

Barclays shares are at a ten year low and the CEO has been embroiled in the Jeffrey Epstein saga, but maybe from an investor’s point of view this is good. The P/E is low, and once (if) dividends are restored to the pre-Covid level they will be attractive at the current share price. The dividend cover is 4.77, that is too, suggesting that Barclays can afford to restore thier dividends.

I do worry about its exposure to the UK economy though.

Period Share price (approx)
Current share price 111p (26 June)
2020 high 185p
12-month high 187p
Five-year high 289p
Ten-year high 320p (2013)
20 year high 760p (2007)
Market cap £19bn
Yield 2.66% 
P/E 7.88
All time high 760p

HSBC

The big cause for concern relates to political instability in Hong Kong. On the other hand, I do think South East Asia (which has dealt so well with Covid) will be a boom region post-Covid, which should benefit the bank. HSBC's dividend cover is just 1: which is a cause for concern.

Period Share price (approx)
Current share price 384p (26 June) 
2020 high 595p
12-month high 667p
Ten-year high 791p (2018)
20 year high 1,016p (2006)
Market cap £78bn
Yield 6.16% 
P/E 16.8
All time high 1,023p (2000)

Lloyds

An investment in Lloyds shares is a bet on the UK economy, especially the housing market. How quickly do you think employment, and wages will recover? Do you see negative interest rates? And what does this mean for the housing market? Throw into the equation Brexit and the effect you believe this will have on the UK economy.

The dividend has taken a big hit thanks to Covid. If things return to normal post-Covid, then dividend yield based on the current share price might be very attractive next year. But that’s a big if. On the other hand, dividend cover is 3.12, so there is apparently scope for increasing dividends.

Period Share price (approx)
Current share price 31.62p (26 June)
2020 high 63p
12-month high 64p
Ten-year high 84p (2015)
20 year high 512p (2002)
Market cap £22bn
Yield 3.54% 
P/E 9.03
All time high 644p (1999)

RBS

These days RBS is UK centric, gone are most of its intersects in the US, Asia, Central and Eastern Europe, Africa and the Middle East.

I am just not convinced that post-Brexit and post-Covid, the UK is the best area to be in.

There is one stat that is interesting though: dividend cover is a massive 13. It would seem that the bank can afford much higher dividends, all else being equal.

Period Share price (approx)
Current share price 120p (26 June)
2020 high 244p
12-month high 261p (December)
Five-year high 367p (2015)
Ten-year high 493p (2010)
All time high 6,048p (2007)
Market cap £14.6bn
Yield 1.66% 
P/E 4.62

Standard Chartered 

The company has strong exposure to Taiwan, Korea, China, Indonesia, India and Thailand - I like that. These will be strong growth areas (in my opinion), assuming there is no war between India and China, of course.

Things move in circles. The last few years have not been so good for emerging markets, which has hit Standard Chartered, but I think South East Asia, in particular, is well placed to benefit from the AI/data economies that are emerging.

The final dividend was cancelled, which is why the yield is so low, but dividend cover is 10.8, meaning that the bank is capable of paying out much higher dividends, assuming profits don’t crash.

Period Share price (approx)
Current share price 424p (26 June)
2020 high 720p
12-month high 733p
Five-year high 1,008p (2015)
Ten-year high 1,800p (2010)
All time high 1,857p (2007)
Market cap £13.5bn
Yield 1.28% 
P/E 9.77

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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