The thing about a trend is that it lasts far longer than you ever expected.
The share prices of financials has been falling yet again. It has been brutal. But just how long will this go on? I’m losing patience with the banks. Most commentators would agree that the Great Recession is over. Britain has a high level of employment. House prices are continuing to rise. Retail sales are rising too, despite some challenges. Yet no one seems to have told the banks.
A tale of woe for the banks
The storm in equity markets has ravaged banks such as Barclays and Lloyds. Barclays’ share price is down to where it was during the 2011 Eurozone crisis. The tale of woe seems to be endless.
Once they made money in the billions. Now UK banks, with the exception of HSBC, can scarcely turn a profit.
The reputational damage wreaked during the Credit Crunch has been huge. This means they’ve been creaking under the weight of fines and litigation. What on earth was the PPI scandal even about? I can’t remember – can you? OK, slight exaggeration. But in any case, it has drawn tens of billions of pounds from the UK’s financial sector. Then there was the money laundering scandal, and exchange rate fines.
All these additional costs filter through to the bottom line. What’s more, billions have been spent clearing the bad debts built up during the Financial Crisis. And banking regulation has been suffocatingly tight.
And then there are interest rates. Most companies welcome low interest rates, as it makes money far cheaper to borrow. But it means that one of the main sources of retail banking earnings, the profits from current accounts, are drastically reduced.
And the difficulty is, I think that interest rates will stay low not just for the next one or two years, but for the long term. This deflationary climate means that the banks will never return to the multi-billion pound profits of yesteryear.
And yet the banks clearly have a future. But they will soon be more like tech companies, organising your finances through apps, cards and cash machines.
They remind me of the utilities in the 1990s
In the 1990s companies like National Grid and SSE were down in the dumps like the banks are today. With energy prices plumbing the depths and, it seemed, never likely to recover, the share prices of the utilities just kept on falling.
Yet fast forward to today and the share prices of the utilities have rocketed, and many people hold a high-yielding investment in a utility. The way investors view these companies has been transformed completely. But, there’s just one problem… it took 20 years.
That’s how long it takes to turn around a trend. Could the same thing happen to the banks? I think it could.
So if you’re a genuine long-term investor in banks, you shouldn’t be worrying too much about the current share price falls. Just tuck those shares away. See you in 2035.
