Could FTSE 100 banks supercharge a £20,000 Stocks and Shares ISA?

The failure of Silicon Valley Bank and Credit Suisse last month caused investors to sell bank stocks first and ask questions later. As a result, all of the five banks on the FTSE 100 are cheaper than they were four weeks ago.

Does this mean that they might deliver superior returns for a £20,000 Stocks and Shares ISA? Let’s take a look.

Big yields

Here’s how the five FTSE 100 bank stocks have performed over three timescales:

I should note that the above figures exclude the dividends paid to shareholders. These payouts would have added several percentage points to the annual return of each stock.

The recent sell-off has left most bank stock dividend yields looking enticing. All except one (Standard Chartered, which is more growth-oriented) are above the average FTSE 100 yield of 3.7%.

Competition

One of the biggest long-term challenges for the established FTSE 100 banks is competition. That’s because challenger banks and fintech rivals are everywhere today. These include Monzo, Starling Bank, Revolut, and many more.

The number of places I can deposit my money today is almost endless.

However, we saw in the US recently that the banking turmoil there caused many depositors to withdraw money from small and mid-sized banks.

Who did they turn to? You guessed it — the large banks.

In fact, they were inundated with customer requests to transfer funds from smaller lenders. It was the biggest movement of deposits in a decade.

I think size and reputation still matters when it comes to banks, particularly in times of distress. And you don’t more established than Barclays (founded in 1690) and Lloyds (established in 1765). 

So I’m not as worried as some about the long-term future of the UK’s big banks.

Will I be buying FTSE 100 banks?

It’s important to remind myself that interest rates were abnormally low for over a decade. Now, due to soaring inflation, they’re been raised significantly.

So I’m bullish on the prospects for the banking sector over the next few years. In theory, higher interest rates should enable banks to produce higher earnings.

Of course, very high interest rates aren’t ideal for banks, as borrowers can struggle to repay loans. But I do expect rates to settle inside a range that will be beneficial for banks moving forward.

I certainly don’t expect them to return to near-zero levels again. That is, not unless there was another full-blown financial crisis. While that can never be totally ruled out, I think tighter regulation and better balance sheets make it more unlikely.

As a result, I’ve put Lloyds on my watchlist recently. With a dividend yield of 4.9%, I think the Black Horse bank looks in good shape to potentially provide market-beating income.

Also, I’ve been digging into Standard Chartered, which is down 22% over the last month. I like its exposure to growth markets such as the Middle East and Asia, where the vast majority of its revenue comes from.

I think both stocks could give my own ISA a major boost.

This post was originally published on Motley Fool