The UK banking sector has been a punch-up for years, and investors have the bruises to prove it. Almost seven years after the run on Northern Rock in September 2007, the battle is far from won.
Barclays (LSE: BARC) is down 16% in the past six months, while Lloyds (LSE: LLOY) is down 8% in that time. HSBC (LSE: HSBA) has recovered in recent weeks, but is still 16% off its 52-week high of 761p.
Investors could be forgiven for wanting to throw in the towel.
Seconds Out!
I’m wary of suggesting that today’s low valuations make today a good buying opportunity, because the sector has repeatedly lured in contrarian investors, only to flatten them.
Yet I still think there’s a great opportunity here, if you’re willing to roll with the punches over the longer term.
Break It Up
A major problem with investing in the banks is that you never know when the next scandal will strike (although you can rest assured it won’t be long).
Another worry is that regulators are taking slow revenge for all those banking misdemeanours. The latest challenge comes from the Competition and Markets Authority (CMA), which recently announced that it may launch a full-blown investigation into whether UK banks give their customers poor service.
The CMA could ultimately force the big four to carve new banks out of their existing organisations, which would hit banking stocks hard. The problem is, investors won’t know the results for 18 months.
Next year’s general election only adds to the uncertainty, with Labour leader Ed Miliband proposing to break up the big banks if he wins power.
Blow By Blow, Bank By Bank
Each bank has its individual battles to fight. Barclays has just posted a 10% fall in profits to £3.84 billion, including a drop of 46% to £1.06 billion in its troubled investment banking decision, and is bogged down in the ‘dark pool’ trading scandal.
Yet these results were actually better than expected, as its bad bank continues to shrink and corporate and personal banking enjoyed a 23% hike in profits to £1.47 billion.
HSBC has also suffered from falling revenues, “muted customer activity” and regulatory uncertainty. It has been hit by uncertainty in Asia, where it earns most of its profits. But it is also fighting back, cutting costs, closing underperforming businesses and pumping its core tier 1 ratio to a beefy 13.6%. Now the share price could be on the mend.
Lloyds is finally starting to punch its weight, with a 32% increase in half-year underlying profits and falling impairments. Given its UK focus, should disproportionately benefit from the domestic recovery.
But it is still far from clean, as shown by this week’s £218 million fine for LIBOR manipulation and £600 million additional provision for PPI mis-selling.
All three banks should be encouraged by recent first-half results from Royal Bank of Scotland (LSE: RBS), which shocked the market in a nice way for once, by delivering £2.65 billion of profits, thumping expectations. Its share price leaped 10% on the day. Banking stocks will remain a battleground for years to come but, as RBS has suggested, punch-drunk investors could still end up the winners.
