Regulators Are Destroying The Investment Case For Barclays PLC, Royal Bank of Scotland Group Plc, Lloyds Banking Group PLC And HSBC Holdings plc

HSBCRevenge, they say, is a dish best served cold. In the wake of the financial crisis, regulators were remarkably slow to slake the public’s thirst for vengeance, but slowly, steadily, they are turning the screw.

HSBC Holdings (LSE: HSBA) is the latest bank to complain about its treatment on the regulatory rack, after posting a 12% fall in profits in the first half of the year to £12.3 billion.

Chairman Douglas Flint said the regulatory reform programme was placing “unprecedented” demands on its human capital, and operational and systems capabilities. 

His complaint that the “increasingly fragmented, often extra-territorial, still evolving” reforms were “hugely consumptive of resources that would otherwise be customer facing”.

Customers seem to be enjoying the gruesome spectacle, but investors can feel the bankers’ pain.

Hang ‘Em, Flog ‘Em

And there is plenty pain more to come. The Competition and Markets Authority looks set spend the next 18 months deciding whether to carve up the banks in a bid to boost competition in the current account market (which most customers are broadly happy with). 

Victory for Ed Miliband’s Labour in next May’s general election will add to investors’ agonies, given his public pledge to break up the banks.

The Bank of England’s Prudential Regulatory Authority is also punishing the sector, and introducing tougher new rules to punish bank bonuses, on top of the EU bonus cap.

Billions Will Go

As one banking scandal after another emerges, massive cross-border fines are a daily threat. Just ask French bank BNP Paribas, which was recently ordered to pay a record $9 billion fine for violating US sanctions against Sudan, Iran and other countries.

Imagine what a fine of that size would do to HSBC, Barclays (LSE: BARC), Lloyds Banking Group (LSE: LLOY) or Royal Bank of Scotland (LSE: RBS).

They already have enough on their plate, racking up massive penalties for PPI mis-selling, money-laundering, Libor fixing, energy price fixing, interest-rate swap mis-selling and plenty more besides.

Only last week, Lloyds was fined £218 million for its role in Libor fixing, while Barclays previously paid £267 million, and RBS has shelled out £363 million. 

Barclays still has to face up to the ‘dark pool’ scandal.

And it seems that another wave of PPI mis-selling claims are about to strike.

There really is no end to this in sight.

Toxic Avengers

Once it became clear that the big banks had survived the financial crisis, investors made fortunes in their subsequent share price charge. Lloyds has still delivered a 140% return over the past two years.

But now the sector is being calmly hung, drawn and quartered to please the mob.

The endpoint seems to be clear: banks must no longer be too big to fail. The question is whether this will leave them too small to succeed.

The answer may be found in Barclays’ recent retreat from global investment banking.

The sector may still spring nice surprises, as we have just seen at RBS, which threw off its chains to post a life-enhancing £2.65 billion of profits.

And I would rather invest in a lean, clean banking sector than the toxic swamp of yore.

But the banks are now a very different investment proposition to the one we have been used to, and investors must adapt if they’re to avoid falling accidental victim to regulatory revenge.

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Harvey Jones has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.