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Bank stocks look cheap now. Should I buy for the recession?

Young Black man sat in front of laptop while wearing headphones
Image source: Getty Images
Young Black man sat in front of laptop while wearing headphones
Young Black man sat in front of laptop while wearing headphones

UK banks stocks have all fallen over the past 12 months, as inflation has been soaring and we’ve been heading unavoidably into a recession. Barclays shares, for example, are down 19% over the past 12 months.

The Barclays share price had recovered from its Covid losses. But the ravages of 2022 mean shareholders are now looking at a five-year loss of 17%.

I’ve picked Barclays because I see it as probably the most diverse UK bank stock. It embraces both retail banking and corporate banking, and it’s transatlantic in its outlook. The overall picture, though, is pretty much the same with all of them. And since recession was confirmed, UK bank stocks have started picking up again.

Recession

When recession was just a scary possibility, it was an unknown. And the stock market doesn’t like unknowns. But now we’re in it, it seems investors can handle it better.

What should private investors do? Everyone should do their own research and base their strategy on their own circumstances. For me, I see the banking sector as one of the best to go for during the recession.

That’s for a couple of key reasons. One is top fund manager Sir John Templeton’s adage that “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell“.

Nice profits

That would have worked well during the Covid pandemic. When everyone was in a panic and dumping bank shares, those who bought would be sitting on some nice gains today.

Anyone who managed to buy Barclays at the bottom in 2020 would have doubled their money. And that’s even after the renewed hardships of 2022.

I don’t advocate trying to time the market and get in at the best point. No, those who attempt it rarely succeed. To go with ace investor Warren Buffett’s advice, it’s time in the market that counts, not timing the market.

Valuation

So as long as I see a price that I think represents good long-term value, I’ll buy. And that brings me to my next key reason for liking bank stocks right now.

Looking at the FTSE 100 high street banks, I see forecast price-to-earnings (P/E) ratios ranging from around 5.1 for Banco Santander and 5.4 for Barclays, to 8.5 at HSBC Holdings.

Even the most expensive on that measure is only valued at slightly above half the Footsie’s long-term average. I don’t think banks deserve a strong valuation at the moment, but I see that as too low.

Dividends

Forecast dividend yields are in the 4% to 4.7% range. From a sector that traditionally brings in good cash flow over the long term, I think those are attractive.

High interest rates might be helping with their lending margins. But total lending volumes must surely come under pressure over the next couple of years. And I expect we’ll see bad-debt provisions growing. So some pressure on dividends could well come.

Overall, yes, I see short-term risks. But I intend to buy bank stocks over the next couple of years and hold for the long term.

The post Bank stocks look cheap now. Should I buy for the recession? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022