Evening Fool

Friday, 15 May 1998

Market Close
FTSE 100   5917.8  -30.7  (-0.52%) 

Banks Hammered
Bruce Does a U-turn.

The banking sector today took a hammering after the Office of Fair Trading (OFT) warned the industry to pull their collective socks up. The OFT director general, John Bridgeman, is investigating complaints that recently floated Northern Rock changed accounts and interest rates without informing customers. Northern Rock also allegedly has refused to allow customers to move accounts, which they suddenly find now have lower rates of interest, without giving the bank the customary notice period. Mr. Bridgeman took the opportunity to take a swipe at the whole banking sector by saying that he wouldn't be afraid to use his legal powers to protect customers.

For too long the banks have been able to have one set of rules for their customers and another, often contradictory, set of rules for themselves. They are in a huge position of power as, in the case of savers, they already have your money and can impose punitive charges for the slightest misdemeanour on the part of the customer. They can legally do this because it is all written there in the small print. However, charging a loyal customer £35 because they accidentally went overdrawn by 10p for just one day is hardly morally acceptable. In the case of lenders, again the banks have tremendous power over the customer. Mortgages cannot be paid off quicker than the contract states, without of course a huge penalty being imposed by the bank. Banks can levy charges on the lender with the threat of "pay up or I'll reclaim your house."

Banks in this country prey on customer loyalty. This is why so much of their marketing push is aimed at the student market. Once they've got you, particularly in a student loan type situation, chances are you will be a customer of theirs for life. Part of the reason for this is apathy on the customer's behalf. You think it isn't easy to move your often complicated and woven financial affairs to a different bank when you are dissatisfied with the service you are receiving. In reality, however, it's probably easier than you think.

Although I'm a shareholder in one of the UK's leading banks, it doesn't stop me from being disgusted from some of the tactics all the banks get up to. In this benign economic and inflationary environment, they've got it as easy as it's ever going to be. There's lots of money to be made in many other ways than blatantly ripping off Joe Public. I'm with the OFT on this one -- the banks should shape up or ship out!

Having ranted on a bit, I'm now going to do a full 180-degree turnaround. This U-turn is bigger and better than anything we've ever seen in politics. Ready?

The wholesale sell off in banking shares could provide investors with a buying opportunity. The OFT took a swipe at all banks, but the current investigation is all about Northern Rock. In the past, companies that have been the subject of particularly bad news have seen their share price hammered to the point where it is arguably a bargain. A recent example is HSBC Holdings, which, at the height of the Asian crisis back in October last year, saw its share price plummet from a high of 2253p to a low of 1242p as investors worried about the global banking giant's exposure to that region. The share price has since recovered to 1678p, having hit 1913p this calendar year.

Today's mass sell off could be considered an overreaction by the market. Banking shares have had a tremendous run over the past 2 years, as their huge profitability in the current economic environment has been recognised by investors. Where it once the norm for banks to have price to earnings (P/E) multiples in single digits, now P/Es of 20 or more are relatively commonplace. In the past couple of months, though, banking shares have dropped from their recent highs. Investors have lost patience at the lack of merger activity despite what is happening in the US. Many of the UK banks have taken the opportunity to say they are not interested in buying other banks "at the current prices." But that was 2 months ago, and in that time the share price of some of the potential take-over candidates has fallen by 20% or more. This could present an opportunity for the well managed bank.

At the Fool, we would never encourage anyone to invest in a company just because they think it will be taken over. Invariably, the take-over never happens and there is a danger that the share price will fall as the company is again rationally valued by the market. In fact, many Foolish investors categorically do not want their company to be taken over, as the reason they bought it in the first place was because they believed in its growth prospects as an independent entity. However, Fools may consider having a closer look at the current valuations of some of the better managed banks in the county. These ones will invariably be the suitors rather than the targets in any take-over situation, but will be the ultimate beneficiary in terms of profitability and therefore share price appreciation.

Conquerors

JJB Sports hasn't been mentioned in this section of the Daily Fool for quite some time. In fact, the sportswear retailer hasn't been mentioned much at all in the Daily Fool since its results were released in mid-April. Today, shares in the company spiked up 24p to 548p. There was no apparent reason for this share price movement, but investors will hardly be complaining.

Football shares have been in the news recently as the domestic season comes to a close. Only a few weeks now till the World Cup! One company whose fate has been known for quite some time is Manchester United. The movement in their share price over the past couple of months has reflected the fact that they were out of the European Cup and the lost the league title, both in quick succession, by falling from a 1998 high of 162p down to a low of 126p. Today, shares in the company curled a winner into the top corner, shooting up 8p to 138p. Again, there was no news this hack could find which precipitated this jump, apart from the fact that the club may be about to splash out more money on a new player. As this has a direct effect on the short-term profitability of the company, this sort of news normally is enough to see the share price go down, not up. Who said the market was rational?

Colt Telecom continued its recent surge, jumping another 145p to 2085p. Since it released results on Wednesday, Colt's market capitalisation has risen by an amazing £600m. Not bad for a company with 1997 trailing sales of £82m!

Vanquished

As the lead article said, banking shares felt the full brunt of the OFT's displeasure. Leading the way south was Northern Rock off 51p to 555p. Others to drop included Lloyds TSB, down 33p to 861p, Abbey National 34p to 1047p, Halifax 12p to 777p, Alliance & Leicester 20p to 800p and Woolwich 6p to 340p.

Allied Carpets followed in the footsteps of fellow big ticket retailers Carpetright, DFS and MFI by today releasing a profit warning of its own. The shares were carpeted 47p to 89p. Allied said that trading over the crucial Easter and early May bank holiday period was below expectations. It now expects profits for the full year to be considerably below the level of 1997. In sympathy with Allied, Carpetright lost 23p to 337p and DFS was off 11p to 256p.

Stoves Group was another to issue a profit warning today, and shares in the cooker company were burnt down 49p to 159p.

And Finally...

It's FA cup day tomorrow, and here at Fool UK we usually like to support the underdog. Tomorrow that is definitely Newcastle United. However, we feel loathe to support a club which has been the centre of scandal for the last few months, from the "fan bashing" by two of the club's now former directors to the Alan Shearer "did he deliberately kick him or not" affair. But we don't feel comfortable supporting Arsenal either, because... they're Arsenal, aren't they? (Arsenal fans, please feel free to flame me with your emails) So, to be fair, we'll side with the goalkeepers of each team. We hope you each let in lots of goals.

Have a great weekend, Fools. See you on the message boards.

Bruce Jackson (TMF Googly)

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