Are the FTSE 100’s banks really cheap at the moment?

The most typical strategies used to evaluate whether or not shares — together with these on the FTSE 100 — are pretty valued are the price-to-earnings (P/E) ratio and the price-to-book (PTB) ratio. The previous’s an earnings-based measure whereas the latter seems to be at an organization’s steadiness sheet. Earnings traders can even contemplate the yield on provide.

Some quantity crunching

Making use of these to the Footsie’s banks reveals a large variation in valuations. For instance, the Lloyds Banking Group P/E ratio (trailing 12 months) is sort of twice as excessive as that of HSBC (LSE:HSBA). Equally, the PTB ratio of NatWest Group‘s double that of Normal Chartered.

With regards to dividends, there’s additionally a big differential. Present (26 August) yields on provide vary 2.1% and 5%. The typical for the index as an entire is 3.4%.

Out of favour

Based on the most recent annual international banking assessment revealed by McKinsey & Firm, “banking is the only largest profit-generating sector on this planet”. And but valuations don’t replicate their spectacular monetary efficiency.

A few of that is most likely because of the unpredictable nature of their earnings. As HSBC says: “We function in a world setting characterised by fixed change and uncertainty, creating volatility in each financial forecasts and monetary markets”.

In its report, the administration consultancy claims that the business has the bottom PTB (0.9) of any on this planet. By coincidence, that is the common of the 5 banking shares on the FTSE 100.

The MSCI World Banks index, which contains 74 of the biggest monetary establishments, has a P/E ratio of 12.3 and yield of three.6%. Of the UK’s greatest, solely Lloyds has a better earnings a number of however the quoted yield’s equal to the common of the Footsie’s 5.

Broadly talking, this implies that – primarily based predominantly on their earnings – the UK’s banks are modestly undervalued in comparison with their worldwide friends.

A world large

Personally, I believe HSBC affords the perfect worth. Since August 2024, the financial institution’s share value has risen 44%.

However this rally seems to have paused recently as its most up-to-date outcomes — for the six months ended 30 June (H1 25) — fell wanting analysts’ expectations primarily resulting from issues at China’s Financial institution of Communications, through which it now has a 16% curiosity. In the course of the interval, it needed to increase more cash. HSBC subsequently recognised $2.1bn of dilution and impairment losses in its outcomes. It’s a reminder that the Chinese language financial system — and its actual property sector specifically — stays fragile.

However HSBC has a world attain. Though slightly below a 3rd of its internet working revenue got here from Hong Kong in 2024, it has 41m prospects in 57 nations. Almost 40% of its income is earned exterior of Hong Kong, UK, US and France.

Sturdy and steady

Nonetheless, exclude what the financial institution describes as “notable objects” — and foreign money actions — and its revenue earlier than tax was 5% increased than in H1 24.

For 2025-2027, it’s focusing on a return on tangible fairness within the “mid-teens” (except Trump’s tariffs disrupt the worldwide financial system). And with over $3.2trn of property on its steadiness sheet, it has the monetary firepower to resist any potential headwinds higher than most.

It additionally pays probably the most beneficiant dividend of the FTSE 100’s 5 banks.

For these causes, together with its enticing valuation, I believe HSBC’s a inventory price contemplating.