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The best thing about savings accounts is that they are completely safe. The first £85,000 per person per bank is protected by a government-backed safety net. However, I know some people who are rich just from saving money. Meanwhile, investing in stocks is risky, even in bank stocks.
Savings account rates are rising
Recently, until 2022, the savings account offers the lowest interest rate. Some savings accounts pay only 0.01% annual interest. For me, it’s hardly worth having. After all, inflation (the rising cost of living) quickly eats away at future spending power.
From December 2021, the Bank of England has raised the base rate 10 times. Today, it is 4% per year. Top-of-the-table savings accounts offer 3% to 4.5% interest per year, depending on how much money is locked away.
Of course, everyone should set aside cash in an emergency fund for the inevitable rainy day. But my wife and I prefer to bear the money, working hard to get a higher profit. And that is why most of our capital is invested in stocks.
Banks boost profits
British banks are making headlines today for being stingy with deposit interest rates. Instead of raising this in line with the rising base rate, they instead chose to increase their own profits. Therefore, they have widened the net interest margin – the spread obtained between the lending rate and the savings rate.
When MPs and consumer groups grumble about British banks, I’m not loyal. If I’m not happy with the deposit rate, I quickly switch my savings to a new provider. My friend Martin Lewis at MoneySavingExpert is a strong advocate of this approach!
I prefer bank stocks to savings accounts
If banks make more profit from consumers, why should I buy bank stocks? Here are the current stock fundamentals for UK ‘Big Four’ bank stocks:
| Bank | Barclays | HSBC Holdings | Lloyds Banking Group | NatWest Group |
| stock price | 175.83 p | 625.83 p | 51.64 p | 285.78 p |
| 52-week high | 202.35 p | 626.3 p | 54.33 p | 313.1 p |
| 52-week less | 132.06 p | 434.7 p | 38.1 pp | 196.91 p |
| 12 month change | -8.2% | +14.5% | +1.4% | +11.8% |
| Market value | £27.9bn | £124.5bn | £34.8bn | £27.7bn |
| Price to earnings ratio | 5.9 | 12.4 | 8.6 | 7.9 |
| Earnings yield | 16.9% | 8.0% | 11.7% | 12.7% |
| Dividend yield | 4.1% | 3.5% | 4.1% | 4.8% |
| Close the dividend | 4.1 | 2.3 | 2.8 | 2.6 |
That’s a lot of figures to take in, but as a value/income/dividend investor, my focus is on dividend yield and cap. Cash yields at these four banks are all decent, starting at 3.5% a year at global mega-banks HSBC Holdings for 4.8% year on NatWest Group (formerly Royal Bank of Scotland).
What’s more, the dividend cover in all four big banks is comfortable, ranging from 2.3 times in HSBC to an impressive 4.1 times in. Barclays. To me, this high cap rate suggests that these banks’ cash payments will not be cut in 2023. In fact, I expect these cash payments to increase this year.
Finally, my wife and I already have shares in Barclays and Lloyds Banking Group in our family portfolio. And despite the dark clouds gathering over the UK economy, I like more Shares are cheaper in these two banks. I have also added NatWest to my buy watch list. But I will wait until the new tax year before buying any more bank shares!
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