Put cash in these big banks – but as an investor and NOT as a saver

If you’re looking for a place to grow your wealth, Britain’s big banks are rarely a good option.

Savings rates are usually uncompetitive — and more than 100 accounts pay 1.8 percent or less, as our sister publication Money Mail revealed last week.

The Bank of England’s key interest rate rose again last week by 0.25% to 5.25%, but most banks are unlikely to pass the increase on to savers any time soon – they rarely do.

However, there may be a way to use the banks to boost your pot of money – as a shareholder rather than a saver.

Dividends paid by banks rose 61 per cent in the second quarter of 2023, with shareholders pocketing £7.8 billion.

Last month, the major banks, including Lloyds, HSBC, Barclays and NatWest, also announced huge profits, partly achieved by not passing on interest rate increases to their savings customers.

Many are now offering shareholders an income that is much more generous than they are giving to their depositors.

“Banks offer a pretty healthy dividend stream,” said Laith Khalaf, head of investment analysis at DIY investment group AJ Bell, referring to the biannual cash payments most major banks make to their shareholders.

“In addition, bank stocks look relatively cheap compared to their historical value due to investor concerns about the economy.”

Investing in big banks is not a safe way to make money. Stocks can slip in the blink of an eye if the economy weakens, or if a bank comes under fire. For example, NatWest shares lost £1 billion in value in the scandal that followed when the Coutts brand closed Nigel Farage’s bank account.

To a saver, the banks may look similar, but they have different business models and outlooks. If you are considering investing, make sure you do your homework. Here we investigate how to recognize a good investment.

Lloyd’s

Lloyds Banking Group last month tried to send an optimistic message to shareholders by issuing a semi-annual financial update. Profits increased by no less than 23 percent and the dividend increased by 15 percent.

But despite big gains, the shares fell hard. Earnings were slightly lower than analysts had expected, and investors fear Lloyds will be hit if people become unable to pay their mortgages because of higher rates. The bank is Britain’s largest mortgage lender, which could explain the concern.

Chief executive Charlie Nunn says the bank has set aside £400m to deal with potential customer defaults, acknowledging that the rising cost of living is a challenge for many.

AJ Bell’s Khalaf describes Lloyds as the ‘most stable’ of UK banks. “It doesn’t have an investment banking division, which can lead to bigger profits or bigger losses,” he says.

The stock is yielding about 6 percent and is down 30 percent over the past five years.

Barclays

Barclays posted a profit increase of 22 percent to £4.6 billion in its half-year results last month.

Still, shares fell as investors had expected earnings to be even higher. The bank also doubled the amount it sets aside for customers who can’t pay their debts. Investors were concerned about Barclays’ “net interest margin,” the difference between the interest a bank charges borrowers and the amount it pays depositors.

As a saver, you want the net interest margin to be as low as possible. This means that a bank is not making huge profits by charging high rates to borrowers and not passing them on to depositors.

But if you are a shareholder, a high net interest margin is a good thing because it means more profit for you.

So when Barclays announced it expected its net interest margin to be 3.15 percent this year, its stock price fell because people expected it to be more than 3.2 percent.

The bank is also making less money from its investment banking arm as fewer companies are closing deals now because they are concerned about the state of the economy. Shares of Barclays are down 14 percent this year, though they’re currently yielding about 5 percent.

This is just one reason why analyst Gary Greenwood of investment group Shore Capital believes Barclays is the most undervalued of all banks.

Barclays also has a share buyback program, in which it buys back a portion of its own shares in cash. This could drive up the value of any remaining share as there will be fewer in circulation.

NatWest

NatWest’s half-year results last month were overshadowed by the departure of boss Dame Alison Rose following a row over the closure of former UKIP leader Farage’s account at NatWest-owned Coutts.

The share is 9 percent lower this year. NatWest also lowered its net interest margin guidance to a level similar to Barclays.

However, shareholders welcomed the higher-than-expected profit, up 27 per cent to £1.8 billion. The bank also announced a dividend of 5.5 pa and a share buyback program similar to that of Barclays. Shares are now yielding nearly 8 percent thanks to the recent turbulence.

HSBC

HSBC shares rose to a post-pandemic high last week when it revealed a profit of £16.9bn for the first six months of 2023 – up from £6.9bn last year.

It announced plans to pay dividends worth around £1.6bn – and buy back £1.6bn worth of shares. The bank’s share price has been much stronger than the other UK banks in recent months as it is a much more global bank and has a strong focus on Asia. Shares are up 20 percent this year and are now yielding 5 percent.

Funds for finance

Picking winning bank stocks is difficult for even the most sophisticated investors and many prefer a fund.

Although no fund invests exclusively in banks, a number of funds have a large share in financial companies. In this way you are not tied to the fate of just one bank and you therefore spread your risk.

Khalaf suggests Man GLG Income, which has Barclays and HSBC in the top ten. The fund invests primarily in UK companies that derive a significant portion of their profits from UK clients. It’s 46 percent over three years and 19 percent over five years.

James Yardley, of investment platform Chelsea Financial Services, suggests GAM Star Credit Opportunities, which invests in the bonds of banks including HSBC, NatWest and Barclays. It is a decrease of 2.1 percent over three years, but an increase of 3.6 percent over five years.

For a cheaper option, Khalaf suggests buying a fund that tracks the FTSE 100 index of the 100 largest UK companies. That’s because all major banks appear in this list. Funds include iShares Core FTSE 100 ETF, which costs just 0.07 percent per annum in ongoing charges.

“Banks make up about 10 percent of the UK benchmark index,” says Khalaf.