 Print this page |
Raynor reviews: The banking sector
|
Following the recent crisis in the financial sector, Nick Raynor, investment adviser at The Share Centre, examines why some banks may now offer investors a glimmer of hope
Only a few months ago the banking sector was in crisis. Last year Northern Rock and Lehman Brothers collapsed, the Government had to bail out RBS, and HBOS was forced into a merger with Lloyds TSB. Dividend payments were cancelled almost across the board.
Now, however, there may now be some hope for investors who already hold shares in some banks and for those investors willing to accept a degree of risk.
Resiliance put to the test
Take Barclays: a bank that has proved resilient despite the challenges of the past 12 months. As the credit crunch hit harder and questions arose concerning Barclays’ exposure to toxic debt, the bank proved the strength of its position by passing the Financial Services Authority stress test earlier this year.
top up your savings
Barclays’ resilience can be attributed to two significant decisions. The bank shunned Government support and, in 2008, it bought out Lehman Brothers’ North American business for just £144m – a move that contributed greatly to its strategy of developing into a major bank with growing margins and rising profits.
HSBC has also demonstrated considerable resilience to the credit crunch, proving to be something of a safe harbour for investors as, like Barclays, it avoided Government support. Its Far East origins have stood it in good stead and it looks well placed to develop new business in the future.
Lloyds’ merger with HBOS at first appeared to represent a significant opportunity, but no one anticipated the scale of HBOS’s losses. The taxpayer subsequently took on 43.3% of the group and it lost its chairman. Not good news.
However, the recent success of the entitlement offer, asset sales and capital injections, and its strong UK banking business indicate Lloyds should recover in the long-term.
Not all banks are showing the same signs of recovery, and RBS in particular deserves a mention. Losses of £24.1bn in 2008, injections of Government cash which has left 70% of RBS equity state-owned, and its subsequent scaling back of overseas activity – where the highest margins of profits for banks are usually found – have done significant harm to the bank.
So, while it appears some banks are showing signs of recovery, it is also worth exercising a degree of caution. Before you decide, read what our expert has to say.
by Nick Raynor, investment adviser at The Share Centre, 7 August 2009
