Why Now Could Be Timely To Ditch Shares In Royal Bank Of Scotland Group plc, Banco Santander SA And HSBC Holdings plc

As the government reportedly considers selling Royal Bank of Scotland Group plc (LON: RBS), so should we, along with Banco Sandander SA (LON: BNC) and HSBC Holdings plc (LON: HSBA), says Kevin Godbold.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The newswires have it that the UK government is weighing up selling part of its holding in Royal Bank of Scotland (LSE: RBS) later this year, even if at a loss.  

I think that would be a wise move. Selling will eliminate the risk from the ‘investment’ and provide the opportunity for politicians to put ‘our’ money back to work for the benefit of the country and its citizens.

Opportunity cost

Money invested in London-listed bank shares has been dead money for sometime. Look at the share-price charts of Royal bank of Scotland, Banco Santander (LSE: BNC) and HSBC Holdings (LSE: HSBA) — anyone investing in these three banks five years ago will be disappointed. I think the future looks bleak for banking shares, too.

Why has the share-price performance of the banks let investors down? Surely, with the macro-economic picture sputtering back into life, bank shares should be flying! We might think so, but that could be a common misanalysis of the situation.

The banks find themselves up against two distinct forces working against any meaningful advancement as an investment for their shareholders. That makes them unattractive, even as a ‘hold’.  Our money, and the government’s, is better invested elsewhere.

Negative forces

Since the banking crisis, the banks are up against an escalating regulatory burden evolving with the aim of keeping them in check so that the world never faces a banking crisis of such magnitude again.

In Britain, there’s some evidence that regulators’ rhetoric is gathering pace. The very dominance of the UK’s five biggest banks is under threat. It’s a similar story around the world as well. Regulators, with the backing of national populations, want to keep the banks in line and cut them down in size, too. That’s a powerful force working against a longer-term investment in the banks.

The other big problem for bank shares is that the fortunes of banking businesses tend to shadow general macro-economic cycles. Banks are among the most cyclical of businesses on the stock market, and we should never view them as buy-and-forget investments. Share prices in the sector rise and fall with profits, and cash flow, in line with the ups and downs of the macro-economic cycle.

In response, the stock market marks down the value of banks as we progress through the up-curve of the macro-cycle. What I believe we are seeing with the banks, right now, is gradual P/E compression as the cycle unfolds, in anticipation of the next occurrence of peak-earnings. Price-to-earnings measures will continue to fall and dividend yields to rise, even as the banks post rising profits. The valuation-compression effect we see with the cyclical banks is the second negative force working against total investor returns for shareholders.

What next?

Rumours persist that the finance ministry is warming to the idea of selling a partial stake in Royal Bank of Scotland at a loss. I think we should all pick up on that vibe; now really could be timely to ditch shares in Royal Bank of Scotland Group, Banco Santander and HSBC Holdings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »