The British economy is on the up, which is a good thing if you’re looking at the banking sector, where a struggling economy makes operations difficult. Firms in the financial services industry are feeling the benefit of the upswing through a growth in profits and optimism. Longer-term confidence indicators such as employment, which is growing at its fastest pace since 2007, are also evident.
Current outlook
Things are looking particularly good at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) where share prices have risen 62% over the last 12 months. The bank is far along its transformation plan and is widely expected to resume dividend payments in 2014.
Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) has a more murky-looking future. The economic upswing will accelerate the disposal of bad and non-core assets; however, the reputation of the bank is something of a disaster. Legal action stemming from the mis-selling of PPI is impending, while last month the bank agreed to a $100 million fine for breaking economic regulations in the US.
Future is unwritten
In a major speech at the University of London on Friday, Ed Miliband laid out a plan to break up the big five banks to increase competition. The new Competition and Markets Authority (CMA) is to be tasked with coming up with a maximum market share banks will be allowed to hold. Labour admitted that, short term, this may hit share prices in state-owned RBS and Lloyds.
There is doubt among investors that the party currently expected to win the next election could go through with these plans. How do you go about capping market share? This would come from the selling of branches, but who buys them?
Because of this share values didn’t really take a hit. The price of Barclays and Lloyds dropped less than 1% and for RBS it was the small sum of 2%. There’s a belief that Miliband is merely posturing for votes and the break-up plan will be scrapped. Nonetheless there’s now a cloud over the banks until the next general election in 2015.
