FTSE 100: keep calm and buy cheap bank stocks

The UK’s flagship index hit a new all-time high last month. However, the Footsie has since fallen more than 5% on fears of a repeat of the global financial crisis. However, this is why the fear is excessive and why this could be a buying opportunity FTSE 100 bank shares at a discount.

Why is the FTSE 100 down?

Aside from the nerves surrounding Jeremy Hunt’s spring budget, investors have been panicking over the new administration of several US banks, namely Silicon Valley Bank (SVB).

Fears about corporate liquidity have spread in Silicon Valley, leading to bank runs. Within weeks, the California-based bank had written off all of its assets. Since then, the company has ceased trading.

To make matters worse, Capital of Silvergate and Signature Bank also collapsed in panic caused by SVB. Going down from one bank often sets a domino effect in motion.

So, it’s no surprise to see the fear of the US ripple across the Atlantic, also affecting the FTSE 100 bank shares Lloyds, Barclaysand NatWest has seen stocks fall since Thursday as investors fear a contagion event.

Is there any reason to panic?

Despite what is happening across the pond, there is no reason to panic for UK financial institutions, at least for the time being. This is because they have a much less risky deposit base. In other words, the probability of a liquidity crisis is lower.

One of the main reasons is that more established UK banks have a higher proportion of deposits from retail customers. This means that even if there is an open bank, it will be more manageable, given the number of customers with small individual deposits. Furthermore, customer funds up to £85k per account are insured in the UK.

Second, the FTSE 100 stalwarts have lower risk-weighted assets. This is important because it means UK lenders have certainty and access to capital. This can provide a lot of liquidity without incurring huge losses. SVB, in contrast, had to sell long-dated government bonds at a huge loss.

It is for the above reasons that the broker is from Citi, JP Morganand Liberium are all out to allay fears about the collapse of the banking sector, particularly in Europe.

It goes without saying that investing in bank stocks is a risky business. Thus, finding a company with a solid balance sheet with low risk exposure is very important. And after assessing the fundamentals of the FTSE 100 banks, the risk-reward proposition is certainly paying off due to the decline in share prices.

In aggregate, most of them trade at a reasonable valuation when compared to the industry average. Therefore, it is worth considering starting a position in one or even several. In fact, I plan to buy more Lloyds shares to capitalize on the current weakness and the lucrative dividend.