People will look back upon the UK financial industry pre-2007 as a golden age, when everyone wanted to work in banks, and the sector generated billions of pounds in income for the country. However, they suffered badly during the Credit Crunch.
Banking shares are now slowly recovering. Barclays (LSE: BARC) has been one of the fastest of the UK banks to recover. Its share price is trending upwards. Yet a lot of people, myself included, still are unsure about the long-term prospects for financials in this country. Can we really buy shares in companies which have undergone such dramatic change?
Technology has transformed the banks
In the past, you would walk to your High Street branch to cash your cheque, draw some notes, and discuss taking out a mortgage.
However, things have changed dramatically over the past decade. Now most people check their balances, make payments and withdrawals, and set-up direct debits, through their phone or computer.
Whereas banking used to be about relationships and face-to-face interactions, it is now much more about technology. Technology has simplified and speeded up.
This emphasis on speed and convenience is why contactless payments are now so popular, with mobile phone payments on the horizon as well. It can’t be that long before cheques become a thing of the past. I expect soon soon you will be able to order foreign currency and arrange overdrafts and even mortgages on your phone. In short, instead of visiting your High Street branch, you’ll just click on your phone app.
This means that banks will be leaner, and more technology-driven. There will still be a need for branches, but they will focus more on troubleshooting and business banking. There will even be less cash machines, as more and more people pay by card.
I think we have entered an age of permanently low-interest rates. The days of 5% interest rates being the norm are long past. Because of this, it is unlikely banks will ever again see the bumper profits pre-Credit Crunch. Only the leanest of the banks will survive.
There is much to be hopeful about
However, there is still much to be hopeful about. Barclays is one of the most forward-looking of the banks. With Barclaycard it is one of the leaders in card transactions – this is a sector which will continue to boom. I believe there is a bright future for its investment bank as well, though it will have to turn its attention away from the West and towards the Orient. And it is still one of the most successful retail banks in the UK.
I see Barclays, alongside peers such as Lloyds, as income plays. There is unlikely to be rapid growth, but a burgeoning economy, including a host of flourishing small businesses, will mean profitability will steadily recover. A 2015 P/E ratio of 13.55 and a 2016 P/E ratio of 10.44, with dividend yields of 2.85% rising to 3.84%, mean that the company is still fairly priced, with the main appeal being that increasing yield.
The financial sector today reminds me of IBM after the PC revolution. In a few short years the company’s business model went out of the window. It had to turn from a mainframe manufacturer to a PC-maker and then a services provider. The banks face a similar challenge. Never has the future looked so different from the past.
