2 income stocks investors should buy in the banking sector!

Income stocks are also represented in my portfolio, and so are banks. These stocks provide me with regular dividends in the form of dividends, although these payments are not guaranteed.

It also reflects a more general preference for investing in established companies, which, in theory, offer lower risk than investing in growth stocks. After all, new companies often fail, or fail to deliver the growth they promised.

So here are two banking stocks that I think investors should be stacking.

Lloyds

Lloyds (LSE:LLOY) is the best banking option. It is inexpensive, trading with a price-to-earnings ratio (P/E) of seven – it is half the index average – and there are several near- and long-term catalysts for growth.

The bank will get a boost from this week’s news that the UK and the EU have struck a new Brexit deal. This, if it gets through parliament, should benefit Lloyds more than other banks.

That’s because 100% of Lloyds’ sales come from the UK, but its commercial lending business has collapsed since Brexit. Wider market commentary suggests that the UK will be a better place for investment and business once Brexit is over – this should provide a boost to the commercial lending business.

In February’s full report, we also saw that higher interest rates had a material impact on earnings. By 2022, net income is expected to rise by 14% to £18bn, but higher disruption costs – £1.5bn – mean profits will remain flat year-on-year.

However, I think that we are seeing increasing evidence that these interest rates will continue for much longer than anticipated. And that’s because inflation is proving to be very sticky, and economic activity is proving to be resilient, despite higher rates and the cost-of-living crisis.

Lloyds’ lack of diversification – it is heavily focused on the UK mortgage market – may be a problem for some. But I also see it as a steady, perhaps rather boring, stock that trades far below its fair value – the discounted cash flow model suggests it’s undervalued by around 55%. That’s why I still buy more because the price goes up.

It also has a forward yield of around 5.2%.

HSBC

HSBC (LSE:HSBA) recently reported that quarterly profits almost doubled, boosted by rising global interest rates, and announced a special dividend. Stock prices are rising.

But even after this increase, I will still buy more. As with Lloyds, higher interest rates play a major role in revenue generation. Net interest income increased.

However, full-year profit fell from $18.9bn to $17.5bn, largely due to a $2.4bn charge to sell its retail banking operations in France.

Looking forward, the high interest environment seems likely to persist and economic forecasts improve in the UK and East Asia – where the majority of its income. China’s economy will grow 5.2% in 2023.

HSBC has come under pressure from shareholders Ping An to separate the Asian business from the slower European and US businesses, and that could be problematic for shareholders.

However, the broad consensus is positive and I would buy more of this stock for its growth and 4.3% dividend yield.