Is the party over for the big FTSE 100 banks?

Investors have had great fun with FTSE 100 banks lately. I certainly have with my sector pick, Lloyds Banking Group. But I could just as easily have partied with Barclays (LSE: BARC), NatWest, HSBC Holdings, or even Standard Chartered. All have delivered champagne returns over the last few years. But are things are about to go flat?

We shouldn’t read too much into a short-term movements, but I still sense the mood has shifted this week. My Lloyds shares are down around 3.5%. They’re still up 60% over 12 months and 150% over two years, with dividends on top, so I’m not exactly complaining. Maybe I’ve just been spoiled by all the fizz and fun.

Others have fallen harder. NatWest is down 8.5% over the week, and Standard Chartered is down 6.5%. Barclays (3.5%) and HSBC (2%) have both slipped too.

HSBC, Lloyds, and NatWest shares fly

At some point, the steam had to come out of the sector. Banks are no longer cheap. The Lloyds price-to-earnings (P/E) ratio recently topped 15. When I bought in 2023, it was just six. As share prices have risen, yields have fallen. New investors aren’t getting the same income as they did two years ago.

Banks have also feasted on higher interest rates. This has allowed them to widen their net interest margins, the gap between what they pay savers and charge borrowers. With rates edging down, that may fade.

If my guess is right and we have hit peak banking stocks, the absolute top might have been Wednesday (10 February). Barclays posted a 13% jump in annual profits to £9.1bn, announced a £1bn buyback and pledged to return £15bn to investors over two years. The shares rose, but they didn’t explode.

Barclays has done brilliantly

Why? I suspect it’s because so much good news was already priced in. Barclays’ P/E had climbed to 17, well above its 10-year average of roughly seven to nine, depending on the source. Even bumper shareholder rewards lose their sparkle when investors expect them to blow out the lights. Investors looked past its thriving corporate and investment banking operations, to focus on the wilting UK retail banking and wealth management side. So what now?

I’m not selling my Lloyds shares. I intend to hold them for a decade or more, letting dividends and growth compound. If they do struggle, at least my reinvested dividends will pick up more stock at the lower price. I wouldn’t suggest investors consider offloading other banking stocks either. Share price growth often comes in waves. I’ll sit tight and wait for the next big breaker.

We should brace for slower progress. The party atmosphere is fading. Rates are easing. Revellers may move onto the next big shindig. But I’m staying faithful. If we get further dips, I’ll be tempted to act.

Barclays offers the international exposure Lloyds lacks, and would sit nicely in my SIPP. Its P/E has already slipped to around 10.5 as new earnings figures are priced in. I think it’s well worth considering at that price, and if it dips further, I won’t be able to resist. Party on.