UK bank shares are rebounding. So are they still cheap?

The past week has been a rough road for bank stockholders. With the Swiss giant Credit Switzerland on the brink of failure, panic selling sent stock prices plunging. But like I said last weekend, I’m not worried.

Up and down

Here’s how the Big Four stocks in the UK have performed over three timescales:

Bank	stock price	Change one month	Change a year	Change five years
Barclays	142.66 p	-16.1%	-14.9%	-29.2%
HSBC	564.6 p	-11.8%	+9.1%	-16.6%
Lloyds	47.77 p	-7.9%	-3.2%	-26.0%
NatWest	269.2 p	-4.7%	+14.5%	-0.9%

Each stock had fallen between about 5% and 16% in the month through Wednesday’s close. On Monday morning, all four took a sharp dive, before rebounding for three trading sessions.

For example, Barclays (LSE: BARC) shares hit a low of 128.12p in Monday’s plunge, when Lloyds Banking Group (LSE: LLOY) shares were down at 46.65p that day. But all four stocks have bounced back from Monday’s lows.

Is this stock still cheap?

Before delving into the fundamentals of each stock, here’s a quick guide to the Big Four banks (in AZ order):

Barclays: Blue Eagle bank is a leading lender to UK individuals and companies, but also operates an international investment bank.

HSBC Holdings (LSE: HSBA): this mega-bank is truly global, with 39 million customers in 62 countries.

Lloyds Banking Group: Black Horse bank is the leading mortgage lender in the UK, with 26m customers and original dating back almost 330 years.

NatWest Group (LSE: NWG): this is a leading mortgage lender and also a leading lender to small and medium-sized businesses.

Now for stock valuation:

Bank	Market value	Price to earnings ratio	Earnings yield	Dividend yield	Close the dividend
Barclays	£22.6bn	4.8	20.8%	5.1%	4.1
HSBC	£111.2bn	9.2	10.9%	4.9%	2.2
Lloyds	£32.2bn	6.7	15.0%	5.0%	3.0
NatWest	£26.2bn	7.5	13.3%	5.1%	2.6

While the three banks are worth £22bn to £33bn, HSBC is a FTSE 100 super-heavyweight, with a market value in excess of £111bn.

Two things came out of my second desk. Firstly, dividend yields across all four beat the FTSE 100’s cash yields by around 4% per annum. Second, the dividend cover – from 2.2 times at HSBC to 4.1 times at Barclays – is solid.

Now for some bad news. This is a trailing (historical figure) and I expect 2023 earnings to be lower than 2022. This will reduce earnings per share and cover dividends. Even so, I expect this cash payment to be paid in full or even increased this year.

I would buy Barclays and Lloyds

Today, I like to buy shares in Barclays and Lloyds. To me, both banks look undervalued, with Barclays shares looking very shady and unloved.

However, my husband and I already own two stocks in our family portfolio. Also, we have almost 100% exposure to stocks now, with very little money to invest. So I will bide my time before buying more.

Finally, risk warning for all four bank stocks. With economic growth slowing, Britain could enter recession this year. This will affect the profits, income and cash flow of all four banks. Also, higher bad debts and loan losses will be negative for the bank’s valuation. However, I buy stocks for the long term and not just for one year returns!