THE directors of some of Britain’s biggest banks have been snapping up shares in the financial giants they run, signalling their confidence in the sector.

Of all UK executives, banking directors have been the most active buyers of their own shares over the past three months, according to Digital Look, a financial website: Stephen Green, group chairman of HSBC, recently bought almost £145,000 worth of the banking giant’s shares.

With many banking shares trading at 15-year lows, some analysts believe now is the time to follow the directors’ lead and buy into the bombed-out banks.

Although they make up about 15% of the FTSE 100 index, bank shares have been shunned by fund managers since the credit crisis began. Fears about undisclosed exposure to imprudent lending and other problems, such as the £3.7 billion fraud at French bank Sociéte Générale, have made many investors wary.

But with four out of five of the big banks reporting healthy profits in the past two weeks, they appear to have weathered the credit crunch better than many feared. Royal Bank of Scotland (RBS) revealed profits of almost £10 billion for 2007, despite a £2.9 billion hit from the credit crunch. With just HSBC, the UK’s biggest bank, left to report, total profits for the sector are set at least to match last year’s £37 billion.

Toby Thompson, who runs New Star’s UK equity income fund, has about a quarter of his portfolio in banks.

He said: “The reporting season has helped to put aside some of the wilder fears about the impact of the credit crisis on UK banks.”

Some analysts believe they are worth buying on price alone. Bank shares have plunged an average of 19% over the past six months. They are 10% lower since the start of this year.

Graham Neale at Killik, a stockbroker, said: “There is an argument for investing some money back in the sector. The outlook is still not particularly rosy, but it is difficult to ignore the banks when their valuations are so low.”

Many experts, though, still urge caution, concerned that there could be more bad news lurking round the corner.

Karen Olney, head of European equity strategy at Merrill Lynch, said: “We are still seeing surprise writedowns. Until the banks are able to arrest their shrinking balance sheets, I think it is hard to buy whole-heartedly into the sector.”

Concerns about the state of the housing market and its impact on the mortgage business are also prompting some to remain wary.

Yet even the sceptics admit that at current prices bank shares look like outstanding value. One established measure of value is the dividend yield – dividend income as a proportion of the share price. Yields rise as share prices fall and the sector is now at its cheapest for more than a decade, with an average dividend yield of 5.8% against 3.6% for the Footsie.

Olney said: “The gap between the dividend yield paid by banks and that of the market has only been this wide once since 1970. That was in 2000 after the dotcom crash.”

The fact that bank shares offer a good source of income is one of the main reasons they have proved popular in the past. All the big players have been increasing dividends in an effort to regain favour with the City.

RBS lifted its dividend by 10% last week, mirroring a similar move at Barclays. Alliance & Leicester raised its dividend payment by 2%, even though its profits were down by almost a third. The dividend increases have already caught the attention of some private investors.

TD Waterhouse, a stockbroker, said that nearly three-quarters of trades last week had been in UK bank stocks. RBS was the group’s strongest buy, with Lloyds TSB, Barclays and Alliance & Leicester also among its top five buys.

Angus Rigby at TD Waterhouse said: “Our investors have been lured into the banking sector with hopes of juicy yields.”

Most analysts recommend steering clear of Bradford & Bingley and Alliance & Leicester as they look vulnerable to further shocks. Like Northern Rock, they relied on wholesale markets for mortgage funding and were badly hit as the cost of borrowing soared.

New Star’s Thompson prefers Lloyds and Barclays because he thinks they will pick up business from their struggling rivals.

There are several specialist financial funds but they don’t only invest in banks. They buy shares in insurance companies and investment management firms as well. Stephen Marriott of adviser Bestinvest recommends Jupiter Financial Opportunities, although this has an exposure to the sector of only 1%.

You can also get access to banks by buying general UK schemes. Marriott likes Edin-burgh Partners UK Opportunities, which holds 15% in UK banks.

Bill Mott, at Psigma Income, and Stephen Whitaker, who runs New Star UK Growth, have invested in bank shares through the crunch. This has damaged returns over the past six months, but if there is a recovery they could soar.

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