- Lion Finance will be the sixth bank in the FTSE 100 when it joins the index next week
- Banks’ share prices have sagged this year after a barnstorming run since 2021
- Valuations are higher and the macroeconomic outlook less certain
“Analysts expect banks to generate almost a quarter of the FTSE 100’s forecast aggregate pre-tax profit for 2026 and pay out a fifth of its dividends, so the lenders matter to the UK equity market as much as the supply of appropriately priced credit helps to grease the gears of the nation’s economic engine,” says AJ Bell investment director Russ Mould.
“It is therefore interesting to see the banks’ share prices falter this year and investors must now ponder whether this is telling them something about the banks themselves, the financial markets’ plumbing, or the economy more widely.
“Lion Finance is about to join Barclays, HSBC, Lloyds, NatWest and Standard Chartered to become the sixth bank in the FTSE 100, but the sector does seem to be losing some momentum.
“As of the close on Thursday (19 March), the FTSE 350 Banks sector index was down by 6% in 2026. That leaves the sector ranked just 24th out of the 38 industrial sectors that make up the FTSE 350 overall, which is a huge contrast to 2025 when Banks ranked third behind only Precious Metals & Mining and Aerospace & Defence – and indeed the last five years when Banks come in second, behind only Aerospace & Defence.
Source: LSEG Refinitiv data
“It is easy to see why the banks’ shares have done so well.
“Profits have mushroomed. After years of pain, in the form of asset sales, restructuring and regulatory and conduct fines in the post-Great Financial Crisis era, the big lenders have earned their way back into investors’ affections. Their combined pre-tax profits came to £50.7 billion in 2025, an all-time high, and analysts have pencilled in further increases for 2026 and 2027. As a result of that, the banks trade on less than 10 times forward earnings for 2026, a discount to the FTSE 100’s 13 times rating, to perhaps suggest they are still cheap.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered.
“The big banks have also paid their way back into investors’ affections with bumper cash returns, in the form of both dividends and share buybacks. The total return via both mechanisms in 2025 was £31 billion, the second-highest sum ever from the big five and equivalent to a cash yield of 8% based on their current stock market valuations.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered. *Buybacks total as declared as of 19 March 2026.
“Finally, at the start of the year at least, the macroeconomic environment looked benign.
“Interest rates were declining only slowly and structural hedges locked in healthy net interest margins, while loan losses were muted, regulatory fines limited and, for those with investment banking operations, financial markets buoyant. That combination underpinned analysts’ forecasts for higher profits and dividends in 2026 and 2027.
Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered.
“In this context, the recent drop in the FTSE 350 banks index could just be a blip. However, the banks’ share prices are, for the moment, not listening to such arguments and perhaps focusing on three new issues.
“First, the shares have done so well, so they are simply no longer as cheap as they were. Each of Barclays, HSBC, Lloyds, NatWest and Standard Chartered began this decade trading at big discounts to tangible net asset value, whereas at their highs earlier this year, they all traded at a premium to book value. Barclays has just dipped back to a modest discount now, but you get the point. In addition, only NatWest’s forecast dividend yield currently exceeds the 10-year gilt yield.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts, LSEG Refinitiv data. *Price to book value based on Q4 2025 tangible net asset value per share. **Dividend yield for 2026E based on consensus analysts’ forecasts.
“Second, HSBC has brought its buyback programme to a halt while it digests its $13.6 billion purchase of the 37% stake in Hong Kong’s Hang Seng Bank it did not already own, and NatWest has also declared a pause on its current programme after its £2.7 billion swoop for Evelyn Partners.
“That may mean total buybacks from the banks decline for the second year in a row in 2026, and the markets are proving sensitive to this shift in momentum, not least as they may prefer the safety of buybacks to the risks associated with acquisitions.
“The current aggregate cash yield, based on buybacks plus dividends, for 2026 is 5.6%. That still beats cash in the bank, inflation, and the 10-year gilt yield at the time of writing, and may keep patient income-seekers happy. But it is down from last year and investors now must decide for themselves whether that premium yield is enough to more than compensate for any risks that they perceive.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts. *Based on aggregate of forecast dividends and share buybacks declared for 2026 as of 19 March 2026.
“Finally, the macroeconomic environment looks less certain, thanks in the main to the war in the Middle East. Interest rates may stay higher for longer to support net interest margins and even structural hedges may defer some of the benefit, but any economic slowdown due to higher energy prices could lead to an increase in loan losses that offsets the extra interest income.
“In addition, banking stocks are weak in the USA and Europe too, albeit again after a long, storming run.
Source: LSEG Refinitiv data
“This is due to gathering fears over potential exposure to private credit and private equity after the First Brands and Tricolor blow-ups in America and the decision by certain private credit funds to block redemptions by nervous investors who want to take their money out. Some see this as an uncomfortable echo of the closure to redemptions of Bear Stearns mortgage-backed security-focused credit funds in 2007.
“Others are less concerned, given that First Brands and Tricolor were in the sub-prime credit sector and they still look like isolated incidents. But the FTSE 100’s lenders may well get questions, and requests for reassurance, about the degree of their loan book exposure to private credit and private equity come the time of their first-quarter results in April and May.”
Source: LSEG Refinitiv data
