de Uphaugh, chief investment officer at fund
manager MajedieAsset Management.
‘The shares were often trading at two to
four times banks’ book value before 2007.
Now, Barclays and RBS are trading at 0.9
times, while HSBC is on 1.1 and Lloyds is
about 1.3. In essence, they are far cheaper
than they were but they have more capital,
more liquidity and are less vulnerable to
systemic shock,’ he adds.
This suggests that UK clearing banks
have long-term potential, a view backed up
by a recent report for the Competition and
MarketsAuthority which reveals that, even
after being shown up as cavalier towards both
customers and investors, the big four banks
still dominate the current account market.
Its survey of almost 4,500 bank customers
shows that more than half have been with
their bank for more than ten years. People are
thinking about switching but the rate at which
they are actually switching is declining – from
21% over the past three years to 16% in the
12 months toApril.And very few people
actually take the plunge – 8% in the past three
years and 3% in the year toApril.
10
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THE INVESTOR
B
anks used to be seen as solid,
mature businesses providing
steady growth and generous
annual dividends.
But the financial crisis
exposed the banks as over-leveraged
institutions that had failed to manage their
risks appropriately.
Northern Rock was the first to fall,
followed by the other converted building
societies,Alliance & Leicester and
Bradford & Bingley.These supposedly
ultra-conservative institutions had strayed
from their core areas of expertise and had
to be rescued by the government and/
or stronger peers.Their demise proved to
be the precursor to a far wider and deeper
malaise that attacked almost every bank in
the developed world and brought the UK
banking sector to its knees.
The impact has been felt by taxpayers,
thanks to the huge rescue packages required
to bail out the banks.The global recession
that followed can be partly attributed to the
banking turmoil. Equity investors in the
clearing banks – Barclays, HSBC, Lloyds
and RBS – were also hit as share prices
plummeted.
Since then, recovery has been slow.
Banks have become the scapegoat for the
fast-spending, highly indebted culture that
pervaded theWest before the crisis. It is an
image they have found hard to shrug off, not
least because of the waves of scandal that have
hit the sector in the intervening years.
From mis-selling PPI to fixing LIBOR
rates and manipulating foreign exchange
markets, the succession of scandals has been
breathtaking. It has underpinned regulators’
resolve to change the way banks operate and
behave.As well as paying billions of pounds
in fines, they have been forced to strengthen
their Tier 1 capital ratios, a key measure
of their financial viability.This means their
balance sheets are stronger and it has become
more expensive for them to invest in assets
deemed to be risky, encouraging the sector
to return to a business model focused on
retail banking.
‘Before the crisis most UK banks had a
Tier 1 capital ratio of around 6%. Now they
are up to 11% or 12%.At the same time
their valuations are much lower,’ says James
‘Because banks look broadly similar and
banking is perceived to be free, people tend
to move only when their existing bank really
upsets them,’ says Steve Davies, head of UK
retail banking at consultants PwC.
The banks are trying hard to regain
customers’ trust.They’re investing in
service at their branches and developing
their technology, so they can appear more
customer-friendly while cutting costs.
‘Banks are on a far sounder footing than
they were,’ says de Uphaugh.‘The UK
economy is doing okay, Europe is recovering
and interest rates are likely to rise, which
is good news for them. Behaviourally, too,
we’ve seen a big change. Of course, banks are
leveraged institutions so they are never going
to be bulletproof, but in terms of risk and
reward the pendulum has swung too far.
‘In due course the legacy fines will drop
away, and in the end the banks will be able to
pay good dividends again.’
Nonetheless, the industry faces
considerable hurdles.
‘Regulation is the main challenge.An
important secondary challenge is increasing
ANALYSIS
BANKING
