Are Barclays PLC, Lloyds Banking Group PLC And Royal Bank of Scotland Group plc Now Only For Masochists?

When I sold my stake in Royal Bank of Scotland Group (LSE: RBS) 18 months ago, it was the last big bank to exit my portfolio, having previously sold both Barclays (LSE: BARC) and Lloyds Banking Group (LSE: LLOY). It was the second best sector call I have made, bettered only by my decision to sweep the beleaguered supermarkets from my portfolio.

Banking stock performance hasn’t been disastrous over the last two years, both Barclays and Lloyds are up around 5%, but any progress has been far too painful for me.

There Will Be Blood

The big banks are on the rack and there seems no end to the tortures they face, as regulators and unhappy investors constantly tighten the screws. Since the financial crisis, the big banks have been bled for around £50bn in an endless scourge of penalties, lawsuits and fines, and there is plenty more to come.

Some tortures appear to be eternal, notably the hellish PPI mis-selling scandal, which first emerged in 1988 but rattles its chains to this day. The Financial Conduct Authority may even unleash a fresh round of bloodletting next month, if it decides customers were due compensation because nobody told them how much of their PPI premiums went on the adviser’s commission.

As I noted here last week, the total bill could hit £33bn. That’s on top of the £26bn of provisions they have made so far. 

Off With Their Heads

Even if the FCA does draw the line under PPI, the regulatory scourge won’t go away. Barclays, RBS and others have both settled with US regulators over Libor-rigging claims, but this has merely opened the gates to a fresh lawsuit in London, with investors from around the world set to turn the screw in a global class action. Each new scandal now seems to beget yet another.

The big banks have stuck their necks out all over the world, and are now paying the price. RBS, for example, could be garrotted by the Federal Housing Finance Agency for selling mortgage-backed securities through its US subsidiary Citizens. It has set aside $2.9. The US is court claim is for $13bn.

Doing business in the notoriously litigious US is increasingly punishing, especially for foreign companies (just ask British Petroleum).

Paying For Pain

The are plenty of agonies I haven’t yet mentioned. In the UK, the big banks face a string of mis-selling claims over interest rate swaps, card fraud insurance, packaged accounts and uncle Tom Cobleigh’s mobile phone cover. I would have a bit more confidence if I thought the banks were changing their ways, but the aggressive sales culture is hard to shift. Staff are still under pressure to hit targets, and cutting corners will always be tempting.

Mis-selling can still make money. Ironically, big banks have still earned far more from PPI than they have spent on compensation. But for me, there is simply too much pain to justify the diminishing gains from the sector. Masochists may disagree.

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