Should I Invest in UK Bank Stocks in 2022?
UK bank stocks have been mostly out of favour with investors since the “Great Recession” of 2008 - from which the sector has still not fully recovered. Since then, banks have been forced to operate on record low interest rates, which has negatively affected banks’ ability to generate revenue.
However, at the time of writing, the Bank of England (BoE) has raised the UK’s base interest rate three times since December 2021 and further increases are projected in 2022. With interest rates on the rise, could UK bank shares be a good option in 2022? In this article, we will examine the prospects of three of the largest UK bank stocks: Lloyds, Barclays and HSBC.
Table of Contents
UK Bank Shares – The Current Climate
For well over a decade, the UK banking sector weathered fairly torrid conditions – which led most investors to eschew UK bank shares in favour of alternative options.
First was the financial crisis of 2008 and its aftermath, which hit banks particularly hard, leading to the government famously bailing out both Lloyds Bank and NatWest – then called the Royal Bank of Scotland.
The next shock came from the result of the 2016 Brexit referendum, where the UK decided that their future lay outside of the EU and its single market. This was followed by more than four years of drawn out negotiations and uncertainty regarding the future relationship between the two.
Then, of course, in March 2020 the coronavirus pandemic arrived in Europe, forcing many countries into economic lockdowns and causing UK bank stocks to plummet.
However, after years of record low interest rates, central banks are beginning to raise base rates to tackle rising inflation, and the UK is no different. As of April 2022, the BoE has raised its base interest rate three times since December 2021 and more increases cannot be ruled out this year.
After operating on low rates for over a decade, UK bank shares could be set to benefit from an increase in deposits and the opportunity to generate more income from loan repayments.
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Lloyds Bank Shares
Despite at one point having a large overseas presence, these days Lloyds is very much a UK-centred operation. Likewise, despite previously having an investment banking arm, Lloyds now solely concentrates on retail banking. In fact, it is the largest retail bank in Britain.
Due to its change in structure, the future success of Lloyds is now solely reliant on the UK economy. Is this a good thing? Yes and no.
A UK-centric operation means that Lloyds is no longer vulnerable from external, overseas shocks and, at a time when uncertainty is rife across the globe, this can certainly be seen as a positive. However, at the same time, its dependency on the future of the UK economy can be seen as a negative.
Lloyds’ success is reliant on the UK economy flourishing, not only post-pandemic, but also post-Brexit. Below we can see a long-term price chart of Lloyds shares.
The plunge in price highlighted by the red rectangle is the result of the financial crisis in 2007/8 – after which the UK government acquired a 43.4% stake in the group. In 2017, the UK government confirmed that all its shares had been sold.
Before the economic crisis, Lloyds shares were trading at around 280p, however, in the 14 years or so since the crash, Lloyds Bank shares have been stuck in a range between 20p and 90p.
Zooming in to the more recent price history of Lloyds Bank shares, we can see the full effects caused by the outbreak of Covid-19 in February 2020. After reaching an 8 year low of 23.55p in September 2020, the Lloyds share price began to recover, but have since stalled and remain a long way from their pre-pandemic levels.
In 2021, Lloyds shares gained 31% and the UK bank reported decent full-year results. Net income for 2021 was reported at £15.7 billion, a 9% increase from the previous year, whilst tax before profit rose an impressive 460% to £6.9 billion.
At the time of writing, Lloyds shares pay have an attractive dividend yield of around 4.4%.
The next UK bank shares we will look at are Barclays shares. Unlike Lloyds, Barclays maintains its international presence, operating worldwide, and has a large investment banking section alongside its retail bank offerings.
An international presence provides investors considering investing in Barclays shares with diversification, as, unlike Lloyds, the success of Barclays is not reliant solely on the UK economy.
In the long-term price chart of Barclays shares above, we can again see the crash caused by the economic crisis in 2007/8 highlighted in red. Despite initially recovering from its low of 55.52p in January 2009, the Barclays share price has mostly been following a downtrend ever since.
Despite falling to its lowest level since 2009 due to the outbreak of Covid-19, the Barclays share price recovered fairly well, recovering its pre-pandemic levels before the end of 2021 and closing the year with a gain of 27%.
In their full-year results for 2021, Barclays reported total income of £21.9 billion, which was very slightly higher than the previous year. It’s profit before tax, however, increased significantly from £3 billion in 2020 to £8.4 billion in 2021. Based on its dividend payments over the past 12 months, the bank’s dividend yield is currently 4.2%.
However, as we can see in the chart, this UK bank stock has hard a poor start to 2022, falling more than 20% in the first quarter of the year and more or less wiping out all its gains from 2021 in the process.
The reason behind this poor start to 2022 was caused by breaching US requirements regarding selling a type of investment product known as an ETN (Exchange-Traded Note). Without going into too much detail, this breach led to a $600 million loss for the UK bank, which caused them to delay their $1 billion share buyback programme this year, with both factors weighing on the Barclays share price.
The last on our list of UK bank stocks, HSBC, is another worldwide operation. It is the second largest bank in Europe and has a strong presence in Asia, where it was originally founded in British Hong Kong.
In fact, Asia remains HSBC’s largest market, with almost 50% of customer deposits and 50% of net operating income coming from this region in 2021.
This connection with Asia has no doubt been beneficial to HSBC in recent years as economies have boomed, but it has also put the bank in the middle of geopolitical tensions between the West and China.
In the long-term price chart of HSBC shares above, again we see the effects of the “Great Recession” highlighted in red.
However, unlike the other UK bank shares we have looked at so far, HSBC shares actually recovered fairly quickly, largely thanks to its operations in China. Although, in the decade or so leading up to the outbreak of the coronavirus pandemic, the HSBC share price has been very volatile.
Looking at the development of the HSBC share price over the last couple of years, we note that, unlike the other UK bank stocks we have looked at so far, the decline caused by Covid-19 was more drawn out.
HSBC shares spent the majority of 2020 in a downward trend, reaching a ten year low of 281.35p in September 2020, after which price began to recover. In 2021, the HSBC share price gained 18% and the UK banking stock currently has a dividend yield of around 4.2%.
In their full-year results for 2021 HSBC reported profit before tax of $18.9 billion, an increase of 115% from the previous year.
Due to being embroiled in a number of scandals in recent years, investing in HSBC shares may be unattractive to those governed by ESG principles. These scandals have included allegations of facilitating money laundering for criminal enterprises, including Mexican drug cartels. For this particular allegation, they were fined $1.9 billion in 2012 for violating US law.
Investing in UK Bank Stocks with Admirals
With an Invest.MT5 account from Admirals, you can invest in Lloyds Bank shares, HSBC shares and Barclays shares! In order to invest in UK bank stocks with Admirals, follow these steps:
- Open an Invest.MT5 account
- Download the MetaTrader 5 trading platform
- Open MetaTrader 5 and log in with your investing account details
- Press Control + U to bring up the Symbols window, shown below. Here search for the UK bank shares you want to invest in and click ‘Show Symbol’
- Head to the Market Watch tab on the left hand side of the screen, locate the symbol you added in the previous step, right click on it and select ‘Chart Window’ to open a price chart
- Press the ‘New Order’ button at the top of the screen in order to bring up the order window, where you can select the amount of UK bank shares you wish to purchase, as well as set a take profit and stop loss if desired.
Invest in UK Bank Shares with Admirals
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- The ability to open an account with a minimum deposit of just €1
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