<div id="readability-page-1"><div><div><blockquote><p><em>Questor</em><em>, The Telegraph’s investing column, takes a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.</em></p></blockquote><p>If there was one sector which investment banks (“sell side”) and institutional fund managers (“buy side”) agreed was a smart investment this year, it was the banks.</p><p>While there were notable, contrarian exceptions, the tone of most commentary on the big lenders was positive.</p><p>It is proving a more volatile year than anticipated – not least thanks to the war in the Middle East – but even in this context, investors could be forgiven for being disappointed with the sector.</p><p>After a multi-year bull run, the FTSE 350 Banks index is down in the year to date. At the time of writing, it sits just 16th out of the 38 industrial groupings that comprise the FTSE 350.</p></div></div><div><div><p>In view of the old market saying – “a ‘bad’ stock in a ‘good’ sector will outperform a ‘good’ stock in a ‘bad’ sector” – it is worth reviewing the bull and bear case for the banks.</p><h2>Good times</h2><p>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. 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.</p><p>In this respect, it is easy to see why the banks’ shares had done so well.</p><p>First, the big lenders have earned their way back into investors’ affections. Their combined pre-tax profits came to £50.7bn in 2025, a record high, and analysts have pencilled in further increases for 2026 and 2027.</p></div></div><div><div><p>Second, 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.</p><p>The total return via the combined mechanisms in 2025 was £31bn, the second-highest sum ever from the big five (Barclays, HSBC, Lloyds, NatWest and Standard Chartered) and equivalent to a cash yield of 7.5pc based on their current stock market valuations.</p></div></div><div><div><p>Finally, at the start of the year at least, the macroeconomic environment looked benign. </p><p>Interest rates were declining slowly, structural hedges locked in healthy net interest margins while loan losses were muted, regulatory fines were limited and – for those with investment banking operations – financial markets were buoyant.</p><p>That combination underpinned analysts’ forecasts for higher profits and dividends in 2026 and 2027.</p><h2>Hard times</h2><p>This year’s drop in the FTSE 350 Banks index might be a blip, but there are concerns investors need to consider as they assess the risk-reward profile of the banks’ shares.</p><p>First, the stocks are no longer as cheap as they were, thanks to the fact that they have done so well.</p><p>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.</p><p>In addition, only NatWest’s forecast dividend yield currently exceeds the 10-year gilt yield.</p><p>Second, HSBC has brought its buyback programme to a halt while it digests its $13.6bn (£10.1bn) purchase of the 37pc stake in Hong Kong’s Hang Seng Bank that it did not already own. </p><p>NatWest has also declared a pause after its current programme following its £2.7bn swoop for Evelyn Partners.</p><p>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.</p><p>Finally, the macroeconomic environment looks less certain, mainly thanks to the war in the Middle East.</p><p>Interest rates may stay higher for longer to support net interest margins but any economic slowdown because of higher energy prices could lead to an increase in loan losses that offsets the extra interest income.</p></div></div><div><div><p>In addition, banking stocks are weak in the US and Europe – albeit again after a long, storming run.</p><p>Some of this may be because of fears over the lenders’ exposures to private credit and private equity – either through their loan books or their investment banking operations – where they have them.</p><p>The lenders continue to rebut such suggestions and assert that a couple of high-profile corporate failures in the US are part and parcel of the business of high-yield lending.</p><p>Some of it may just be wider worries about inflation, interest rates and above all growth, should the Middle East war last for longer than hoped and oil and gas prices stay elevated as a result, to the detriment of consumers’ cash flows and corporate profit margins.</p><p>A speedy resolution in the Strait of Hormuz could at least remove one worry and give the banks the chance to prove that they can be reliable providers of profits and dividends, two decades on from the first rumblings of the Global Financial Crisis.</p></div></div></div>

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<p>Questor's investing column discusses the current state of the banking sector, highlighting both positive and negative aspects. Analysts predict banks will contribute significantly to the FTSE 100's profits and dividends in 2026. However, the FTSE 350 Banks index has declined this year, raising concerns about stock valuations and future buybacks. Factors such as geopolitical tensions and economic uncertainties may impact loan losses and overall market performance. Investors are advised to weigh the risks and rewards of banking stocks amid these challenges.</p>

Can investors still bank on the big banks?