Are Lloyds, Barclays, HSBC and RBS a bargain?

Anyone holding shares in UK banks will know the past few months have been rough with share prices steadily dropping. But what is going on, and does it represent a buying opportunity?

Why are bank shares falling?

A lot of news coverage is focused on the fall in Lloyds Banking Group’s share price, which has been in steady decline for the past three months. But other banks are suffering too - in fact among the big four Lloyds is not faring worst.

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Over the past three months Barclays shares are down 27 per cent, Royal Bank of Scotland 21 per cent, Lloyds 16 per cent, and HSBC’s nine per cent.

There are a variety of reasons for the price falls. Some experts say it is partially due to the EU referendum that is set to take place this year.

“Shares in UK-listed banks are expected to become riskier ahead of the referendum,” says Tara Cunningham in The Telegraph. “The possibility of a ‘Brexit’ could become an important driver of bank share prices.”

That shouldn’t have a long-term affect on prices says Jonathan Pierce, an Exane BNP Paribas analyst. He believes the UK public will vote to stay in the EU, but there will be “inevitable volatility ahead of the vote with numerous potential implications for UK banks and financial services in general”.

There are also concerns that low interest rates will affect bank earnings, particularly on their mortgage books. Also, tax changes to the buy-to-let market could affect sales of those loans.

Another reason shares in banks have been slumping is the fact more and more bank shares have been hitting the market, thanks to the government’s move to sell off its stake in Lloyds.

“Chancellor George Osborne’s success in stuffing pension funds with taxpayers’ Lloyds shares is having an uncomfortable side effect: indigestion,” says Jim Armitage in the Evening Standard. “The Treasury has for 18 months been filling institutional investors’ gullets like foie gras geese with the Lloyds shares nationalised in the financial crisis bailout.”

This means many investors have had enough of investing in banks.

Is this a buying opportunity?

It could be. Most brokers remain positive about the sector as earnings are improving and there is potential for banks to distribute excess capital to shareholders.

“One area that has lagged this year, but where I continue to find opportunities is banks,” says Alex Wright, manager of the Fidelity Special Situations fund, in What Investment. “For example, Lloyds ends the year with more or less the same share price and cheap valuation that it began with, despite hitting the important landmark of paying a dividend for the first time since the financial crisis, and securing its balance sheet.”

Of course, even at prices below most analyst price targets, if the gloomy forecasts of some come to pass it could be some time yet before the recovery in price happens and any investment pays off.

What about other banks?

This year should see some more banks come to the market as National Australia Bank prepares to sell Clydesdale bank and Metro Bank and RBS’s Williams & Glyn are also set to float.

Clydesdale is begin valued “some £500m lower than we were originally led to expect,” says Armitage. That could have something to do with the fact the bank is “a small, PPI scandal-ridden group of branches in the North and Scotland, which have been up for sale on and off since 1999.”

But the extremely low valuation is still surprising. “if you were feeling charitable, you could say this yard-sale valuation is little surprise given the choppy stock market,” says Armitage.

Investors should watch closely what happens with Clydesdale when it is sold next month as it should give a clear sign of what will happen when Metro and Williams & Glyn hit the market later in the year.