When will UK bank shares recover?

After falling sharply, British bank shares have started to recover over the past few days. But show it Barclays still 17% lower than last month and Lloyds Banking Group down 8%.

I think recovery for bank shares is likely to take some time. But I see this as a positive for investors.

Crisis

When bank stocks are in the spotlight, it’s usually not a good sign. And this comes as customer confidence in banks has been shaky lately, causing investor confidence to falter as well.

Two weeks ago, two US banks collapsed, sending shockwaves through the global banking sector. And worse this followed when Credit Switzerland – banks that comply with Basel III regulations – must be kept by UBS.

While no two banks are the same, the event delivers shares FTSE 100 banks collapsed. So far, there have been no bank failures in the UK as a result of the latest crisis.

Although central banks are doing their best to maintain order, investors seem wary. And I am careful this is likely to prove durable.

Recovery

What shares will do in the future is closely related to investor sentiment. While this may be difficult to predict, I think there are some clues about what recovery might look like.

First, investors are not convinced by efforts to maintain confidence in banks. Authorities in the US, Europe, and the UK have acted decisively, but these efforts have had limited impact on stock prices.

This makes it difficult to see what news, announcements, or developments might cause the stock to jump back to where it was. The market seems to want to see stability first, then buy.

Second, I think what is required is a period of steady performance from the bank. If they can manage this, then I think bank stocks will look cheap and start to attract attention.

This will not happen overnight. But there are several reasons why persistently low prices can be good for investors with a long-term focus.

Buy bank shares

Obviously, one advantage of a low price is that it gives investors a better opportunity when buying stocks. But there’s another reason shareholders benefit from falling prices.

UK banks are among the FTSE 100’s most active constituents when it comes to buying back their own shares. Lloyds is spending £2bn on buybacks in 2022 and Barclays has deployed around £18bn since 2020.

Buybacks provide value to shareholders by reducing the number of shares outstanding. When the stock price is higher, buybacks do not reduce the overall number of shares.

In other words, investors get more from stock repurchases when prices are lower. So the prolonged decline in bank stocks is also good for investors from that perspective.

Overall, I think the current situation – and especially the case of Credit Suisse – demonstrates that there are real risks in investing in banks. But for investors who know what they are doing, this can be a great opportunity.