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It has been an incredible few years for shareholders in many leading British banks. Take Barclays (LSE: BARC) as an example. Barclays shares have grown 196% over the past five years. Despite that, they continue to trade on a price-to-earnings ratio of 11.
The bank is not alone.
In fact, rival Natwest has done even better. Its share price has risen 240% over the past five years. Yet it is still only 10 times earnings. Its yield of 4% is just over double Barclays’ dividend yield.
So, have I missed out by not owning any bank shares in recent years?
Why I have avoided UK banks
Although I was not invested in Barclays, I did hold some Natwest shares at one point in recent years.
I sold and made a profit I was happy with at the time but that looks modest given the longer-term performance of the share in the time since.
It is always easy as an investor to look back on actions taken (or avoided) and think ‘if only…’.
However, that does not mean it is not still a useful exercise.
Was I wrong to avoid Barclays shares in recent years? Certainly my main concern – that a widespread economic downturn could hurt profits at UK banks – has not come to pass in the way I feared it might. Or, at least, not yet.
Ongoing risks to the banking sector
Still, that does not necessarily mean I was wrong.
I took an investing decision based on the information I had at the time, my own risk tolerance, and my assessment of risks. Looking back, I think that decision was valid, even though Barclays shares have done brilliantly in recent years.
What about now? After all, the valuation still looks fairly attractive and Barclays has demonstrated its resilience.
It has a strong brand, large international customer base, and is massively profitable.
In short, even now, I remain wary. Why? The same reason as in recent years. I fear the risk of a fallout from any large-scale international downturn.
Learning from the past
Am I simply being obtuse?
After all, people who put money into Barclays shares five years ago and have done nothing since have more than tripled their money (once dividends are taken into account).
The reason I think my position makes sense is a long memory. The 2008 financial crisis saw British banking shares lose value on a grand scale.
Despite their rise, Barclays shares are still nowhere near their level back in 2007. And even that was just a fraction of where they had stood five years earlier in 2002.
Banking can be a very profitable business, but it carries sizeable risks when the economy goes into a steep downturn.
I still see that as a risk – and Barclays’ large investment banking arm gives it more international exposure than more domestically focussed rivals like Natwest.
So, given my ongoing concern about weakness in the global economy, I will continue to avoid the share.
