The FTSE 100 is fully of well-known companies, including the top UK banks. With uncertainty around interest rates and increasing market volatility, it’s time I did a deep dive to find my favourite value pick.
Assessing FTSE 100 bank stocks
First on the list is Barclays (LSE:BARC). The bank released its half-year results on 1 August and I noticed several things.
One was the strong investment banking performance. Barclays reported a 10% increase in second-quarter divisional income, driven by a 24% rise in its equities income — better than Wall Street rivals like JP Morgan and Goldman Sachs.
That comes as Barclays plans to reduce its investment banking unit towards 50% of its risk-weighted assets (RWAs) by 2026. However, the bank expects return on tangible equity (ROTE) to be greater than 12% by 2026, up from more than 10% in 2024.
Increased long-term earnings forecasts, execution of its £2bn cost-cutting plan and a focus on growing core UK lending have boosted the FTSE 100 bank stock by more than 40% this year.
A look at the banking rivals
The next bank I looked at was NatWest (LSE:NWG). The share price climbed 17% in July following the bank’s earnings report.
The UK lender reported a higher net interest margin — a key measure of profitability — from 2.05% in the first quarter to 2.1% in the second.
A £2.5bn acquisition of Metro Bank‘s prime loan book also caught my eye. More assets creates more earnings potential, which could be a boost if it keeps bad debts to a minimum.
Elsewhere in the market, Lloyds and HSBC are perennial banking favourites and strong dividend payers. They’re always in the discussion for top FTSE 100 bank stocks given their size and market position.
A look at the numbers
Let’s start with some relative value metrics. The broader Footsie has an average dividend yield of 3.6% right now.
HSBC (7.3%) and Lloyds (3.7%) are currently above that, while NatWest (3.5%) and Barclays (2.6%) are lower.
It’s not all about dividends though. Barclays has the lowest price-to-book (P/B) ratio, with a 0.45 ratio of its market cap versus the value of its net assets held on the balance sheet. HSBC (0.65) follows, with NatWest and Lloyds both sitting at 0.75.
Finally, I looked at the price-to-earnings (P/E) ratios. NatWest (6.4 times) was the winner there with HSBC and Barclays (both 7.2 times) ahead of Lloyds (8 times).
My verdict
On balance, Barclays is my preferred FTSE 100 bank stock pick. With higher expected returns for shareholders, a clear strategy shift and favourable P/B ratio, I place it slightly ahead of its peers.
Will I be buying?
I won’t buy at the moment though. Bank stocks have benefitted from rising interest rates allowing them to earn more from deposits.
With rate cuts on the horizon, I think that could change. I’ve also seen how quickly profitability can turn when competing for market share in the UK mortgages market, such as with Santander last year.
With some green shoots in the economy, I think some out-of-favour companies in the consumer and leisure sectors could be better value than the FTSE 100 banks right now.
This post was originally published on Motley Fool
