Three years ago, I went hunting for the best British stocks to buy for my new Self-Invested Personal Pension. I’d only just set up my SIPP, using the proceeds from three legacy stakeholder and company schemes, and had a serious lump of money to deploy. It was an exciting moment.
I picked some real winners, including Costain Group, Just Group and Rolls-Royce Holdings, all of which are up around 180% since I bought them.
Inevitably, there have been some disappointments. I snapped up spirits giant Diageo and ‘King of Trainers’ JD Sports Fashion after their shares plunged on shock profit warnings, only to see the warnings stack up and the shares sink further. I still think both stocks will recover, but we’re not there yet.
Lloyds shares are flying
I bought just one FTSE 100 bank: Lloyds Banking Group (LSE: LLOY). My only regret now is not buying more of it. And not buying the other big banks too.
At the time, Lloyds looked like a cracking opportunity. It was cheap, with a price-to-earnings (P/E) ratio of around six, while the forward yield topped 5%. I assumed the market would eventually wake up to the value on offer. In truth, it already had.
The Lloyds share price has surged 150% over the past two years and is up 69% over the last 12 months. Barclays, NatWest Group and HSBC Holdings have at times done even better, and that’s before dividends are factored in.
The banks have finally shaken off the financial crisis and have momentum on their side. I’ve got spare cash sitting in my SIPP and I’m itching to put it to work. Should I buy another bank?
I’ve always been a contrarian investor. That instinct drew me to banks when nobody wanted them, and it paid off. Today, nobody would call the sector unloved. Valuations are no longer down, and the easy recovery gains may be behind us.
FTSE 100 dividends and growth
Banks have been rare beneficiaries of higher interest rates. They’ve used these to widen their net interest margins, the gap between what they charge borrowers and pay savers. With rates expected to fall further this year, that could reverse. On the other hand, falling mortgage rates could revive the housing market, cut debt impairments and boost loan demand.
This isn’t a monolithic sector either. Different banks have different risks. Lloyds is directly exposed to the UK economy, focusing on bread-and-butter personal and small business banking. Barclays has a beefier risk-reward profile through its investment banking arm and growing footprint in the US and Middle East. HSBC offers exposure to Asia, a huge long-term opportunity, but one that carries risks as China slows.
Despite their strong runs, the big banks don’t look wildly overpriced. Lloyds sits at the pricier end on a P/E of around 15, compared to roughly 14 for HSBC, 13.3 for Barclays and 12.5 for NatWest. None are screaming bargains, but none look stretched either.
I don’t expect the next couple of years to be as spectacular as the last two, but with a long-term view, the big UK banks still look worth considering today. Since I already own Lloyds, I’m leaning towards buying Barclays or HSBC. I may even end up owning both.
