Personally, I’ve never been a big fan of banks, they’re just too difficult to understand. Many other market participants share this view, including Terry Smith, who used to be one of the City’s most respected banking analysts.
However, while I’m cautious about the banking sector as a whole, there are three banks in particular that I believe all investors should avoid.
Crippling impairments
Standard Chartered (LSE: STAN) is at the top of my list. I have praised Standard before but no it’s becoming clear that the bank’s troubles are spiralling out of control.
Standard’s management announced that total impairment charges, or bad debts during the third quarter had jumped to $539m, more than double the figure reported for the same period a year ago. Total impairments for the year to the end of the third quarter hit $1.6bn and operating profit for the quarter fell 16% year on year.
Unfortunately, it’s possible that another wave of impairments could be about to hit the bank, causing crippling losses. Specifically, management noted that third quarter impairments were a result of:
“…a small number of accounts, primarily in the Corporate and Institutional Clients segment, some of which have been affected by weak commodity markets…”
Since the third quarter commodity prices have only deteriorated, implying that the bank is set for further losses as clients struggle with adverse market conditions.
Business Overhaul
Banco Santander (LSE: BNC) (NYSE: SAN.US) is attractive due to the bank’s hefty dividend yield, which currently stands at 8.3%. However, Santander is being shaken to the core by its new executive chairman, Ana Botín as she reshuffles the management team. She has appointed a new CEO, José Antonio Álvarez, a veteran banker who knows Santander inside out and is highly respected by the banking community.
Mr Álvarez used to hold the position of CFO at the bank and his promotion has sparked rumours that Santander is about to strengthen its capital structure, or reshuffle its financial strategy. Simply put, financial analysts, both here and over in Spain, believe that Santander could be about to announce a dividend cut, capital raising, or asset sales to bolster its financial cushion.
So, for the time being Santander should be avoided until management’s overhaul is complete.
Bankers can’t count
And lastly, Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), which has failed investors constantly since 2008. The bank’s latest failure, was the admission that the numbers used for the European Central Bank’s stress tests, conducted this year, were wrong. Indeed, the original figures supplied by RBS suggested that the bank’s tier one ratio would fall to 6.7% by 2016, in an adverse situation — a three year simulated period of stress — comfortably above the minimum figure required of 5.5%.
However, a few weeks later the bank admitted that it had miscalculated the figures. After recalculating, RBS revealed that its stressed capital ratio was in fact 5.7%, not the previously stated 6.7% — a huge miscalculation.
This revelation has left me wondering, if RBS can’t get its figures right for one of the most anticipated events of the banking calendar, how many times has the bank made this mistake in the past? Moreover, what’s to stop the bank making more mistakes like this in future?
