Image source: NatWest Group plc
There are three FTSE 100 Index banks that I would consider British. Lloyds Banking Group, Barclays (LSE:BARC), and NatWest Group They have the majority of their assets located in the country and derive most of their income from the UK.
On February 12, Andrew Bailey, Governor of the Bank of England, said at a conference: “One remaining puzzle is the market valuation of the UK's big banks… equity investors' demand for returns does not appear to have fallen in line with what appears to be greater stability and lower risk.“
In other words, I thought British banks were cheap.
Since then, their stock prices have recovered by between 42% and 66%. These gains are particularly impressive when compared to those of the FTSE 100 Indexwhich has increased by 11% in the same period.
| Stock | Share price as of February 12, 2024 (pence) | Share price as of August 30, 2024 (pence) | Change (%) |
|---|---|---|---|
| NatWest Group | 207.7 | 345.4 | +66 |
| Barclays | 145.5 | 228.1 | +57 |
| Lloyds | 41.4 | 58.6 | +42 |
But despite this surge, I still think they offer good value for money.
There are several ways to assess whether bank stocks are fairly priced. I'll look at the two most common ones.
Assets and liabilities
A balance sheet approach involves comparing net assets (book value) to market capitalization.
By this measure, Barclays is the clear winner, with a price-to-book ratio of 0.46. This means that if the bank's assets were sold and the proceeds used to pay off its liabilities, there would be enough cash left to return 495 pence per share to its owners.
| Stock | Stock market valuation as of August 30 (billions of pounds) | Net assets as of June 30, 2024 (billions of pounds) | Price/book value ratio |
|---|---|---|---|
| NatWest Group | 28.5 | 37.6 | 0.76 |
| Barclays | 33.1 | 71.8 | 0.46 |
| Lloyds | 36.1 | 45.1 | 0.80 |
For comparison, according to McKinsey, the average for all banks in the world in 2023 was 0.9.
Income and expenses
It is not so clear when it comes to analyzing profitability. The most popular method is to compare stock prices with earnings.
Although NatWest Group appears to offer the best value, Barclays is not far behind.
However, it is worth noting that all three price-earnings ratios are lower than the current FTSE 100 average.
| Stock | Share price as of August 30, 2024 (pence) | Earnings per share – year ended June 30, 2024 (pence) | Price-earnings ratio |
|---|---|---|---|
| NatWest Group | 345.4 | 47.9 | 7.2 |
| Barclays | 228.1 | 31.1 | 7.3 |
| Lloyds | 58.6 | 7.1 | 8.3 |
But I think Barclays has the most room to improve its earnings. This, in my opinion, would make it the best long-term investment of the three.
For the six months ended June 30, 2024, it had the lowest return on tangible equity (RoTE). This means it was the least efficient in using its assets to generate earnings.
This can also be seen by measuring your costs as a proportion of revenue.
| Stock | Return on tangible equity (%) | Cost-income ratio (%) |
|---|---|---|
| NatWest Group | 16.4 | 55.5 |
| Barclays | 12.0 | 62.0 |
| Lloyds | 13.5 | 57.1 |
For every percentage point of improvement in its RoTE, Barclays would generate an additional £500m of profits each year. The bank plans to generate profitability of more than 12% by 2026.
Buyer beware
But investing in a UK bank comes with some risks.
Although the national economy is showing green shoots of growth, a recovery is not guaranteed.
And there is still the threat of more customers defaulting on their loans. Over the year to 30 June 2024, Barclays made provisions totalling £1.88bn as an estimate of the impact of potential bad debts.
However, despite these challenges, I believe now is a good time to invest.
That's why I recently decided to buy a stake in Barclays. I think it's the bank with the most potential in the UK.
It is less exposed to the UK property market than the others. Also, about 40% of its assets are based outside the country, making it less dependent on one territory. And I like its cost-cutting plans, which are currently underway.