Five Big Banks

The second largest FTSE sector has been through quite some turmoil.

A look at our overview UK stock market's sectors shows that the much-maligned banking sector is the second largest, accounting for 12.7% of the entire FTSE All-Share Index by value. That's behind the Oil & Gas sector, which accounts for approximately 18% of the total, and ahead of the only other sector that makes it into double figures, the Mining sector on 11.2%.

The big banks

The table below lists the London Stock Exchange's big banks in order of market capitalization. 

With a whole traumatic year gone by since then, but full-year 2009 figures not yet available, historic P/E values and dividend yields for December 2008 are now pretty meaningless. So instead of historic figures, the table shows estimates for 2009 instead -- with the year being over, it's probably unlikely that any of the currently estimated figures will be very far out. 

As you can see, all these big banks will be issuing results in the next couple of weeks, starting with Barclays tomorrow.

^{(* Net asset figures for HSBC and Standard Chartered are converted at a rate of £1 = $1.60)}

Of the above companies, Royal Bank of Scotland and Lloyds, the big two that faced the worst disasters in the banking crisis and had to be bailed out by the UK government, are both forecast to make losses in 2009 and 2010, and pay no dividends. As a result of government intervention, the Treasury owns 70% of RBS, making it effectively state-owned, and 43% of Lloyds.

Why so few?

Perhaps the biggest surprise is that there are only five companies included in the table. There are a handful of other bank listed on the London Stock Exchange, such European Islamic Investment Bank (LSE: EIIB), but they are tiny operations with market cap of £100m or less.

The dearth of companies is due to the amount of consolidation that has taken place in the banking industry in recent years. For example, NatWest has been part of the Royal Bank of Scotland Group since 2001, and the well-known Halifax, Bank of Scotland, and Cheltenham & Gloucester brands are owned by Lloyds Banking Group.

Also, some well-known high street names are owned by foreign banks that do not have their main listing in London. For example, Abbey, Bradford & Bingley, and Alliance & Leicester, are owned by Spanish banking giant Santander (Abbey and Bradford & Bingley have now been re-branded as Santander, with Alliance & Leicester to follow).

And, of course, a number of other overseas banks operate directly in the UK. There is also Northern Rock, which is now owned by the government.

Valuations

But what of the valuations of the banks in the table above? With the sector in such a state of flux, it's hard to draw firm conclusions. 

Yields and net asset values are more traditional ways to value banks, but using P/E ratios has become more fashionable in the last decade or two. That's when banks have any profits that can be measured!

In the last several years, pretty much all banks have been 'gearing up' their balance sheets to crazy levels. Barclays' assets for example, went from £700bn at the end of 2004 to over £2,050bn at the end of 2008. Its net asset figure at the end of 2008 therefore comprised of £2,053bn in assets and £2,006bn in liabilities. 

This shows how so many banks got into trouble so quickly. With assets of over £2 trillion (some 150% of the UK's entire gross domestic product) a 1% drop in total assets can result in losses of £20bn!

With the bank reporting season about to get into full swing, things might become a bit clearer on the valuation front (although banks accounts are arguably the most difficult for private investors to unravel). With it already looking likely that Barclays is preparing to dish out £2bn in bonuses to its staff, the recent anger of savers and small shareholders could well be inflamed further.

More:

• Oil & Gas sector
• Dissecting The UK Market