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COMMENT
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." ~ J. Paul Getty I remember a time when banks would only lend you money if you could prove that you didn't need it. But that has certainly not been the case in recent years. Aggressive lending by banks has meant that financial institutions have been falling over each other to lend us money. After all, money has been cheap and banks have had lots of it to spare. But now the chickens are coming home to roost. Loan losses have been rising at UK lenders after five rate increases by the Bank of England. This has pushed up personal bankruptcies and also put the brakes on the decade-long housing boom. Consequently, concerns that growth at banks will at best be moderate have reduced investor demand for their shares. The dampened demand is reflected in the lower valuations of banks compared to the market as a whole. Currently, they are priced at around 11 times earnings, which is some 20% lower than the average P/E of the FTSE All-Share. Their yields are higher too - around 4.2% compared to 3.0% for the market as a whole. It seems the market is trying to tell us something! But let's not forget that not all banks are mortgages lenders and credit card issuers. In fact some banks are quite diversified, often extending their reach beyond commercial banking activity to include asset management and investment banking. For instance, only 40% of HBOS's profits are generated from retail banking - the rest comes from corporate, insurance & investment and its international operations. Additionally, some banks such as HSBC and Royal Bank of Scotland are quite geographically diversified. What's more, banks such as Standard Chartered and Banco Santander, which owns Abbey, are heavily exposed to less mature, so theoretically faster-growing markets. The upshot is that not all banks are the same. Consequently, finding the right bank to invest in depends not only on attractive valuations but the source of its profits too. In my view it is right to be cautious about banks, especially those that are heavily dependent on the UK. In particular it may be a good idea to give a wide berth to those that are reliant on the UK housing market. That said the general malaise surrounding banks may provide a good buying opportunity for long-term investors. After all, I would much rather pay £11 for one pound of bank profit than put the £11 in the bank to earn just 50p in interest a year! David owns shares in Barclays. > Britain's Best Big Bank | How Banks Make Money | Why Banks Are Cheap
Company
P/E
Yield (%)
Alliance & Leicester (LSE: AL.)
11.3
5.9
Banco Santander (LSE: BNC)
13.0
3.1
Barclays (LSE: BARC)
10.4
4.8
Bradford & Bingley (LSE: BB.)
11.0
4.9
Egg (LSE: EGG)
16.6
-
HBOS (LSE: HBOS)
9.5
4.3
HSBC (LSE: HSBA)
12.2
4.6
Lloyds TSB (LSE: LLOY)
10.7
7.2
Northern Rock (LSE: NRK)
10.4
3.7
Royal Bank of Scotland (LSE: RBS)
9.0
4.5
Standard Chartered (LSE: STAN)
14.2
3.1