We’ve already had one stock market crash this year, and maybe we’re on course for another as Covid second wave fears grow. Usually, at times like these, I urge readers to buy their favourite shares at knockdown prices, then hang on for the recovery.
However, one sector worries me right now. I would think twice about buying the major FTSE 100 banks like Barclays (LSE: BARC), HSBC Holdings (LSE: HSBA) and NatWest Group (LSE: NWG) today. Or tomorrow, for that matter.
The last dozen years have been a terrible time to invest in the banks. All now trade way below their peak share prices, which they last hit in the months before the 2008 stock market crash.
I’d beware the FTSE 100 banks
The Barclays share price hit its all-time high of 790p in 2007. It has since lost 90% of its value, and now trades at just 90p. RBS peaked at 10,225p in 2007. Today the rebranded NatWest Group share price also trades at 91p, down 99%.
For years after the financial crisis, optimistic investors bought burnt-out banking stocks hoping they’d recoup their lost value. Fat chance of that. They’ve been hammered once again, by this year’s stock market crash. HSBC and NatWest trade more than 50% lower than they did 12 months ago. Barclays is down around 35%.Â
When central bankers slashed interest rates to near zero, the big banks saw net interest margins squeezed even tighter. Russ Mould, investment director at wealth platform AJ Bell, says margins have dropped by 52 basis points (0.52%) since the start of 2017.
That’s a drop of more than a fifth on loan books totalling £2.2trn. Mould calculates it costs them £10bn in lost interest every year. With the Bank of England mulling negative interest rates, those losses may grow rather than shrink.
Stock market crash losers
Worse, the government can dictate policy to these FTSE 100 companies. For example, ordering them to stop dividends and focus their firepower on bailing out businesses instead. Another worry is that the global recession will lead to a sharp rise in bad debts, further wounding balance sheets.
The FTSE 100 banks are finding it hard to make a decent return and absolutely nobody is feeling sorry for them, given prior misdemeanours. Only oil and gas producers and equipment companies have fared worse over the last five and 10 years.
I see a long-term threat, even after this year’s stock market crash has been forgotten. Ageing demographics will heap further downward pressure on interest rates. A shrinking labour force can hit productive capacity and economic growth, keeping rates lower for longer. Just look at Japan.
Barclays, HSBC and NatWest Group have issues of their own. I am particularly concerned that HSBC will get squeezed between Chinese and US governments, and be forced to make an ugly and costly choice.
Today, Barclays trades at just 6.81 times earnings. HSBC stands at 13.1 times, while NatWest is down to 3.73 times. Even at these bargain prices, I’d be reluctant to buy.