Back in the early 2000’s, bank shares were some of the best long bets you could take in the market. They were viewed as de facto defensive utility stocks, when in reality they were leveraging up their balance sheet from 20x to 30x and even 50x in the case of those exotic Icelandic banks
Of course, we all know how this ended in 2007-8… the wheels not only came off, but the wreckage careered over the cliff as well and took the poor British tax payer with it! All bank shares were caught up, even the more restrained organisations such as HSBC and which managed to rack up £20 billion in losses on sub-prime mortgages and other exotic CDO and CLO products.
Since then, many banks such as RBS and Lloyds have been reduced to penny share status, Government bailouts and the ignominy of share consolidations to restore prior share prices!
As well as the hangover from their own bad debts, the regulators have got to work bashing the banks for all their mistakes too and imposing regulation piles on regulation. There is the Vickers report, Basel III regulations and the retrospective changes to product laws have also really kicked in. In response, the banks are shrinking their investment banking divisions and putting aside huge provisions for mis-selling on everything from PPI to Derivatives. We have not even mentioned the Euro Crisis…
Despite all of these headwinds, banks are of course a utility business for corporates and retail customers. As such they can turn out big profits every year even in hard times. During the crisis, they have been able to hugely reduce employee compensation and also sell off the non-core assets they acquired in the boom. This slimming down has started to make big improvements in their returns on equity.
So what will happen next? Every year it seems, bank shares have a run up in their share prices until their results come out, this pattern for long positioning has held steady for 3 years now. Looking at RBS its shares are up 40% in a few months. However, be prepared for its usual denouement and this year will be no different I guess. Despite their efforts, the pain of mis-selling scandals and re-structuring is still ever present and this year won’t be the year that the big banks turn around their profitability. Also, they are still over exposed to the housing market and the euro-crisis and as either of these can turn nasty in 2013 there is still huge risk in the bank shares, more so when they have run up collectively to the degree that they have in the past few months.
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7 comments:
Banks have traditionally been seen as defensive stocks along with water, electricity and the like.
But the fact is, they weren't defensive stocks at all, given the sort of things they were doing.
My own personal experience - I invested in a bank, specifically because I thought it was boring and not glamorous. If I'd stopped to consider, I would have had second thoughts. My own fault of course, and thankfully I wasn't too badly burnt.
If we were to split these into retail and investment decisions, then of course it would be different.
There was an article in the Times a few years ago about Hoare & Co, one of the oldest banks in the City. A small family outfit, that didn't get burnt because, as the Chairman said "We just do boring things like take deposits and lend them out again."
If only we had more of these!
Without divulging too much, I was in investments of various kinds which held up under the onslaught but my statutory bank deposit took a real hit in fees etc.
Certain investments need to behave themselves but banks are immune from worrying about depositors.
Banks cannot be trusted until there is our own Glass-Steagall. And in the meantime maybe a few bankers will join Huhne in prison.
Mis-selling of interest rate swaps was always going to be the next billion++-pound mess for the banks with big UK corporate exposure.
It'll be caveat emptor for the FTSE 350 companies, whose FDs were expected to know what they were doing, but the SMEs...... it's going to be ugly.
Sell into strength. Only when the banks have made adequate provision might it be time to buy them cheap again.
I guess the critical question is at what level do interest raqtes have to rise before the mortagage sector starts to see defaults? UK bank lendings are invariably linked to mortgages...and interest levels have been held down for 5 years. Incomes have not been rising - and loan-income ratios were high just before the crash. Is the level 6% or 8% or 10% before all those loans turn toxic? My first mortgage was at 15% - I remember wondering if interest rates would ever be in single-figures again and it certainly conditioned all my behaviour.
O/T but my new found habit of not turning on the TV meant I missed the Superbowl. And an absolubte stormer it was too!
Damn!
right to read that "" Back in the early 2000’s, bank shares were some of the best long bets you could take in the market. They were viewed as de facto defensive utility stocks, when in reality they were leveraging up their balance sheet from 20x to 30x and even 50x in the case of those exotic Icelandic banks
Of course, we all know how this ended in 2007-8… the wheels not only came off, but the wreckage careered over the cliff as well and took the poor British tax payer with it! All bank shares were caught up, even the more restrained organisations such as HSBC and which managed to rack up £20 billion in losses on sub-prime mortgages and other exotic CDO and CLO products.
""
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