As an investment manager, not liking banks would have been a disastrous stance to take so far this year. Just look at HSBC as an example. This, the largest of the banks quoted in the UK, despite the fact that much of its revenue derives from overseas, has risen by quite a significant percentage this year, to give it a stock market capitalisation that comfortably exceeds the likes of Barclays, Lloyds TSB and NatWest.
NatWest, of course, has its fair share of problems just now. Mergers with Abbey National and Prudential have been discussed, but no longer seem likely, so the bank is vulnerable to an overseas predator. There are plenty of players with both the will and the cash to move in on NatWest. In Europe ABN Amro has been named as having the necessary muscle. ABN Amro has a very successful investment banking operation of its own - Hoare Govett - so it may be that access to the UK's branch backing network is all it seeks. This paints a bleak picture for the employees of NatWest Markets, who presumably are keeping headhunters happy in their endeavours to find new houses from which to ply their wares.
This is what has been driving the banks sector forward - the knowledge that more takeovers are not just likely, but inevitable. Europe is seriously over-banked. If ever an industry was made to benefit from the microchip revolution, banking is it. Yet we are still wedded to the culture of a branch in every high street. Telephone and PC banking will cut swathes through the retail operations of high street banks, just as ATMs and Electronic Deposit Taking will diminish the need for cashiers. A career in banking no longer looks a good long-term prospect for school leavers. There may not be too many Captain Mainwarings in future.
If the pain has not yet ended in the UK, you cannot imagine what it is likely to be like in continental Europe. There are nearly twice as many bank branches per head of population in Germany as that which we have in the UK. So much for Teutonic efficiency. Their banking revolution is only just beginning - but beginning it is. Already the merger between Bayerische Vereinsbank and Bayerische Hypobank has stimulated speculation that more German banks will get together. Branches will be an initial casualty, with fewer staff an inevitable consequence. Much more interesting is what may happen as these banks start to cross borders in their endeavours to deliver a more cost-effective service. Look out for more takeovers of the Deutsche Bank/ Morgan Grenfell, Swiss Bank/Warburg and Dresdner/Kleinwort Benson variety.
Back home it seems that the appetite for domestic acquisition and consolidation is far from sated. Birmingham Midshires has announced it is in talks with Royal Bank of Scotland, admittedly with no ultimate decision on whether or not mutual status is a good thing to retain, having been reached. It is quite difficult to justify to members the denial of a windfall profit likely to exceed the benefits of remaining mutual, unless you are a serious borrower or lender - or both. Halifax estimated the average member would have needed 30 years of continuous association with the society before gaining more than the effective value of the windfall bonus.
Well, we are now right in the middle of the banks' reporting season. Overall profits are expected to grow by around 16 per cent on average. But the position is skewed by good performances that are expected to be delivered by the two heavyweights in the UK market - HSBC and Lloyds TSB. Both have recent mergers under their belts which are enabling costs to be cut out of their operations. The overall picture may not be quite as rosy as the aggregate position might suggest.
And we have many more banks to report now. Perhaps the thing to do is to try to pick smaller members of this growing fraternity, likely to lose their independence as the consolidation of this sector continues. The general period of outperformance for banks may be coming to a close, but there will still be money to be made.
This slowing in the advance of the financials could have implications for the market. It is difficult to find too many bulls among investment professionals these days, but still share prices power on. Analogies are being drawn with 1987. If so, we could be close to the peak, and there is no doubt there will be many who will look at the market as we approach the autumn with growing concern.
The position has changed, though. Global economic expansion at the same time as a low inflationary environment among developed countries has created a virtuous circle for financial assets. The empowerment of the individual is playing an increasingly important role in the direction of markets. It may be difficult to find cheap assets to buy, but I am not convinced we will see the same sort of retrenchment at the end of this year as we saw 10 years ago. I hope not. Still, it may pay to be just a little more cautious as the days draw in.
Brian Tora is chairman of the investment strategy committee at Greig Middleton, stockbrokers. He can be contacted on 0171-655 4000.Reuse content