Investors had great fun with it FTSE100 recently banks. I certainly have my choice of sector, Lloyds Banking Group. But I might as well party Barclays (LSE:BARC), NatWest, HSBC Holdingsor even Standard Chartered. They have all delivered champagne returns over the last few years. But will it all end?

We shouldn’t overanalyze short-term moves, but I still feel like the sentiment has changed this week. My Lloyds shares are down about 3.5%. They’re still up 60% in 12 months and 150% in two years, with the biggest dividend, so I’m not really complaining. Maybe I’ve just been spoiled by all the hype and fun.

Others fell harder. NatWest is down 8.5% for the week and Standard Chartered is down 6.5%. Barclays (3.5%) and HSBC (2%) also fell.

HSBC, Lloyds and NatWest shares are rising

At some point, steam had to flow out of the sector. Banks are no longer affordable. Lloyds’ price-to-earnings (P/E) ratio recently exceeded 15. When I bought in 2023, it was just six. As share prices rose, profitability fell. New investors are no longer getting the same income as they were two years ago.

Banks also feasted on higher interest rates. This has enabled them to escalate their net interest margin, which is the difference between what they pay to savers and what they pay to borrowers. As interest rates fall, this may disappear.

If my suspicions are correct and we have reached a peak in banking stocks, the absolute peak could have been Wednesday (February 10). Barclays reported a 13% rise in annual profits to £9.1 billion, announced a £1 billion buyout and promised to return £15 billion to investors within two years. Shares rose but didn’t explode.

Barclays did brilliantly

Why? I suspect this is because so much of the good news has already been priced in. Barclays’ P/E ratio has risen to 17, well above its 10-year average of around 7-9, depending on the source. Even huge shareholder rewards lose their luster when investors expect them to turn off the lights. Investors forgot about booming corporate and investment banking and focused on weakening British retail banking and wealth management. So what now?

I won’t sell my Lloyds shares. I plan to hold them for a decade or more, allowing the dividends and growth to escalate. If they do have problems, at least my reinvested dividends will buy more shares at a lower price. I would also not suggest that investors consider divesting shares of other banks. Stock price increases often come in waves. I’ll sit back and wait for the next massive breakthrough.

We should prepare for slower progress. The party atmosphere disappears. Prices are softening. Revelers can move on to the next massive party. But I will remain faithful. If we continue to decline, I will be tempted to act.

Barclays offers the international exposure that Lloyds lacks and would be a good fit for my SIPP. Its P/E ratio has already dropped to around 10.5 after pricing in the up-to-date earnings data. At this price I think it’s worth considering and if it drops any further I won’t be able to resist. The party continues.