Just how healthy are the UK’s banks?
Just how healthy are the UK’s banks? This August saw the start of the biggest privatisation in UK history. This wasn’t an eighties-style sell-off though: there was no fanfare; no ‘Tell Sid’ campaign – and few would describe the asset under the hammer as a piece of family silver. This organisation is something the government never wanted to own in the first place and has been keen to get rid of at the earliest opportunity: namely, its 79% share in Royal Bank of Scotland.
PPI-mis selling, LIBOR-fixing, criminal charges, litigation costs, regulatory fines: seven years on from the Lehman collapse, the headlines surrounding the banking sector still help to fan an air of toxicity. For the most part, though, these stories concern legacy issues – i.e. clearing up and accounting for pre-2008 excesses in the industry. Beyond these headlines, how are the UK’s ‘big 4’ banks (RBS, Lloyds, Barclays and HSBC) faring? For retail investors and non-institutional traders, are shares in these institutions worth considering? We take a look at each bank in turn…
RBS
Never judge a book by its cover – and never make assumptions about the health of a business based on the book value of its assets. RBS is a case in point: by 2008, in theory at least, it was the biggest bank in the world. In reality, the bank was in a precarious position: it had just purchased ABN Amro following what the Financial Services Authority would describe in 2011 as ‘inadequate due diligence’ in a move that contributed to the bank being left with precariously low capital levels. There was also the wider problem to do with the underlying quality of the assets it held. The bank was bailed out by the British taxpayer to the tune of £45 billion with the then Labour government paying an average of 502p a share for a 79% stake.
Was this the right time to sell?
Fast forward to this summer and we saw George Osborne offload the first tranche of the government’s stake in the bank – namely 630 million shares, bringing the state-owned stake down to 72.9%. So was this the right time to do it? After all, the selling point was 330p a share – thus resulting in a loss to the UK taxpayer of £1.1 billion. Looking at it from a simple public-purse point of view, it is easy to say that the government should have waited until the share price rises before selling up. But since it has been under public ownership, the share price has been flat (at or around the 350p-mark) and the institution has reported seven consecutive annual losses. Both the Bank of England governor, Mark Carney and Nathaniel Rothschild (tasked by the Treasury to review a potential sell-off) both came out earlier this year to confirm that the time was right for a staged sell-off. This would have the effect of improving the marketability of the government’s remaining stake (thus stemming losses to the taxpayer in the long run) and, according to the BoE, should help to encourage the growth of a competitive yet stable banking sector.
RBS Trading outlook?
The first tranche went to institutional buyers and a retail sale is not expected to take place until 2016. A lot can happen between then and now – although it is probably reasonable to say that this will not be something for casual investors looking for easy money in the vein of BT, British Gas and more recently, the Royal Mail. The Telegraph recently pointed to various potential bullish indicators for the bank: i.e. the fact that it has taken advantage of strong global markets to sell off legacy assets for a healthy profit that gives it leeway to strengthen its core UK operations. Shareholder dividends could be on the cards for 2016 – although a string of fines and penalties from the regulators means this is hardly going to be a safe bet.
Lloyds
Lloyds’ problems stemmed largely from overexposure to the US sub-prime mortgage market. The government’s stake in the bank amounted to just over 43% – although compared to RBS, Lloyds was relatively quick to get its house in order following the bailout and by April 2010 (just 6 months after the government’s second and final injection of funds into the company), Lloyds had returned to profit. The first tranche of shares was offloaded in 2013 – resulting in a £60 million profit for the taxpayer.
Lloyds trading outlook
Over the last couple of years, the government’s stake in the bank has been reduced gradually to just under 13%. Institutions have largely been the recipients of the sell-off although there are rumours that a discounted retail share offer could be in the offing. Over a space of 4 months to the end of August the Lloyds share price fell by around 17.5% – bottoming out at 72p before recovering. Interactive Investor was indicating that this is probably not a reflection of fundamental performance issues – and indeed, profit for the last three months was higher than expected. The general consensus is that shares in the bank will outperform the market over the coming 12 months.
Barclays
Barclays may have weathered the financial crisis without a government bailout – but it has had no shortage of regulatory and legal difficulties to contend with over the last seven years. It has had to set aside a total of £6 billion to compensate for PPI misselling and a further £800 million for penalties arising from foreign exchange manipulation.
Barclays trading outlook
For the six months up until the end of June, the bank reported a 25% increase in pre-tax profits – but is still regarded as being a long way off achieving ‘business as usual’ levels of profitability. New Barclays boss, John McFarlane is in the process of making the organisation leaner and hardier – principally by selling off non-core European arms of the company. The consensus seems to be that Barclays is a solid long term buy option for the time being.
HSBC
As the saying goes, if you’re tired of London, you’re tired of life – or at least you’re weary of the threat of bonus caps, windfall taxes and inquisitorial regulators. Earlier this year, HSBC indicated that it was considering relocating its group HQ from London to Hong Kong. Perhaps as a precursor to a full-scale move further down the line, the end of August saw the announcement that the group’s fund management arm was moving eastward. More widely, the strategy of the bank is to focus increasingly on its Hong Kong operations and to shed or contract underperforming parts of its business elsewhere. This has meant 50,000 job cuts worldwide, along with the sale of divisions in Turkey and Brazil.
This year’s first half profits saw a better than expected 10% jump and the current consensus for the company’s share price is generally optimistic – As an example, 97% of traders with HSBC positions at IG were ‘long’ at the start of September.
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