Ever since the credit crisis of 2008, the UK banking sector has been infertile ground for investors. It has proved to be a debilitating laggard for the FTSE 100 over the past 15 years.
Why is this the case? The cost of bailing out UK banks and building societies to the taxpayer was north of £135 billion.
This crisis sent the country into recession with GDP down 2.6% in the first quarter of 2009.
Not only did RBS/NWG, Lloyds/Bank of Scotland require recapitalising, with Barclays accepting an injection of capital from Qatar, but these banks also needed to increase their working capital ten-fold to deliver the same level of business that they executed in 2008. This decision taken by the government was prudent to shore up their respective balance sheets.
The Bank of England and the regulator (the Prudential Regulation Authority) then went on to decree that many of the UK banks should pull back on investment banking, especially trading in derivatives.
Barclays cleverly’ beat the hangman’ in buying the remnants of Lehman Bros’s operation in New York for a dollar to maintain a presence in New York.
Also, RBS/NatWest was forced to sell assets such as Direct Line, Citizens Bank and a 5% stake in the Bank of China into a ‘buyers’ market’, with Lloyds Banking Group, wholly committed to mortgage lending through the Halifax with The Cheltenham & Gloucester Building Society eventually being ‘hived-off’ to TSB Bank’s portfolio in 2013. The final nail in Lloyds Banking’s coffin was the sale of Scottish Widows to Aberdeen Asset Management in 2014.
British banks over the past fifteen years have found themselves in a difficult position. These former financial titans have now turned into ‘Boring Bank PLC.’ It should not be forgotten that Barclays earned about 40% of the profits from Barclays Capital, under Bob Diamond’s command.
Cumulatively, they are now reliant on fewer arrows to their bows to earn from, in terms of a diverse set of assets being unavailable. Interest rates until the last year have been negligible, which had also eaten into profit margins.
Consequently, from an investment perspective, the return on equity has been moderate, when measured against the performance of US banks. UK banks have averaged about 10%- to 12% in the past few years, though in the case of HSBC last quarter it reached 14.6% and Lloyds’ rate was 13.9%.
However, for a bank like JP Morgan, the return on equity has averaged about 21% recently. Since Feb 2009 JP Morgan share price has risen from $19.90 to $179.27 on Thursday - +800.85% against HSBC on the same date from 365p to 591p - +61.9%% and NatWest Group from 213p to 230p - +7.04%.
UK bank earnings for 2023 have improved significantly for two reasons – firstly recovery from Covid19 and significantly higher interest rates, which lend themselves to greater margins.
However, investors and analysts need little encouragement to vent their spleen if unwelcome news accompanies any of these results.
NatWest Group increased their profits by 20% to £6.2 billion, HSBC by 78% to $30.3 billion, but missed expectations due to an impairment charge of $3 billion against an investment in Bank of Communications. The market took the shares down circa 7% on Tuesday.
Barclays rowed in with profits up 20% to £6.6 billion and implemented significant management changes.
This morning Lloyds Banking posted a profit of £7.5 billion – up 50% on 2022. However, there was a provision of £450m to cover potential costs from a regulatory probe into car loan practices. Lloyds is Britain’s biggest mortgage lender, whose brands include Bank of Scotland and Halifax – shares down 1.3%.
Tomorrow, Bill Winters, CEO of Standard Chartered Bank is expected to post profits of $5.1 billion (Circa +20%).
UK banks – HSBC, Barclays, NatWest Group and Lloyds Banking Group - have been shrouded in scandals since 2012. In the case of HSBC, it has had fines of £1.9 billion and $63 million imposed for money laundering. Barclays has had the acrid stench of Jes Staley’s alleged friendship with Jeffrey Epstein to shake off.
NatWest’s Dame Alison Rose’s indiscreet comment about Nigel Farage banking arrangements with Coutts, cost her job, just as she was bringing NatWest ‘back on the bridle.’ Rick Haythornthwaite will become Chairman in April and Paul Thwaite has been installed as CEO.
These initiatives will hopefully restore damaged reputations. Finally, Lloyds has had issues with Bank of Scotland and today’s car loan practices to deal with.
Return on equity is the key to the Kingdom for an improving share price accompanied by a wider range of businesses to profit from such as fund management.
David Buik is a City veteran and consultant to Aquis Exchange
