Bouncing banking shares could make you see red

Bank shares are recovering from February’s lows, but is it too late to make a profit?

Anyone investing in bank shares last year was on to a sure-fire loser. With the fall out from the credit crunch compounded by recession, shares such as Royal Bank of Scotland (RBS) lost about nine-tenths of their value and led to the Government bailout of the banks.

The slide continued this year and most banks were trading at all-time lows by the end of February.

But since March there's been a big recovery; Barclays saw their share price climb more than 400 per cent. RBS has jumped almost 300 per cent, Lloyds Banking Group recovered almost 150 per cent before this week's new share offer and industry heavyweight HSBC is up about 80 per cent.

Investors who got in at the low point have experienced massive returns on their investments since March. While many are now taking profits, others are still steaming in.

Last week, stockbroker TD Waterhouse reported a 79 per cent increase in the number of bank shares bought with HSBC and RBS in the top 10buys and banks accounted for one-fifth of all deals at the Share Centre.

Despite the rush to invest, is it a wise move or is it too late to profit from the banks' recovery?

Nick Raynor, an investment adviser at The Share Centre, thinks the opportunity for short-term gains has passed: "The banking sector remains a popular trading ground for investors, as many hope to make a profit from current share price volatility.

"However, while the yo-yoing share prices have given seasoned investors plenty of opportunities to dip in and out of the sector, we are advising those new to investing to remain cautious and avoid banks for the time being.

"We believe investors have missed the short-term recovery of the banking sector, as some bank's share prices have almost trebled in the last three months. With regards to the long-term recovery this remains to be seen.

"While overall it appears the banks are starting to take positive steps to manage their debts and create capital, we are advising investors to wait for more evidence in terms of financial results that banks are performing well before buying back into the sector." It's a view that others share. Adrian Lowcock, a senior investment adviser, at Bestinvest says: "The timing of investing in bank shares is difficult to judge and the recent surge in share prices suggests some may have missed the initial recovery. Investors also have to decide which companies to buy and whether to buy the equity or debt of the company."

David Kuo, a director at The Motley Fool, says anyone who has made money on bank shares in the past few months should sell up now. He points out that while bank shares have had a decent run, most of the gains have been based on a punt on share price recovery rather than investing in a future stream of profits.

"One of the main yardsticks of investing is the price to earnings ratio or P/E," Kuo says. "It provides a useful guide as to how much the shares cost relative to every pound of profit a business generates. Currently banks have a lot of "P" but not much "E". So, investors who have made money on the recovery may want to think about locking in some of their gains."

Geoff Penrice, a senior adviser at the IFA company Bates Investment Services, thinks the volatility of the banks – which led to the price swings that allowed canny investors to cash in – means people should be wary: "Most investors would expect the banks to start being profitable at some point in the future. In the short term, however, bank shares are very vulnerable to even slight movements in the valuation of their assets or liabilities and this will cause high levels of volatility," he points out. That was highlighted on Monday when Lloyds' shares rose 6 per cent after news broke that its much-criticised chairman, Sir Victor Blank, will step down next year.

Penrice points out that the legendary fund manager Bill Mott, who runs the PSigma income fund, has historically been quite bullish on bank shares but sold most of those held by the fund in October, on concerns that the downside risk was still high. Mott is also concerned that banks are still opaque and it can be hard to get accurate information on what assets they hold.

Penrice believes that in the medium term, banks such as HSBC and Standard Chartered – which have a strong overseas presence, especially in Asia and developing economies – should benefit from the economic upturn when it happens.

"Of the UK domestic banks, the enlarged Lloyds Group has around a third of the market and so is in a very strong position. But, in summary, there will be some medium- to long-term gains from bank shares or funds which invest in them, but it could be a rocky ride over the next year or two," he says. While the short-term gains in bank share prices have been dramatic and often leading the FTSE, it's important to look at the bigger picture, suggests Richard Hunter, the head of British equities at Hargreaves Lansdown.

He points to the 12-month performance of bank shares, which don't make such pleasing reading. To the end of last week, RBS was down 87 per cent over 12 months, Lloyds was down 78 per cent and Barclays and HSBC were both down 36 per cent. Meanwhile the FTSE fell just 30 per cent over the same period.

"The market view of UK banking shares is becoming polarised. Barclays and HSBC are currently generally regarded as a hold while Lloyds Banking and RBS are, in market consensus terms, both sells," Hunter reveals.

"Lloyds Banking, for example, continues to point to the longer-term potential arising from the acquisition of HBOS, particularly in the savings and mortgage markets. In the interim, however, this very acquisition is causing additional concerns in terms of the need for additional write-downs in an ailing business, while the wider Group's life assurance business has suffered a 22 per cent decline in sales over the quarter.

"Thus, despite the recent share price recovery for UK banks, the general market feeling is that the time is not quite right to be drawn into an outright return to this continually volatile sector."

Against such negativity, there still seems to be support for banks among private investors. While that may be driven purely by sentiment, who's to say that a punt now by brave investors may not be rewarded in the future?

One solution for those backing a banking recovery could be to pick a fund which invests in bank shares, rather than risking an investment direct in the shares. Direct investment means risking the share price slumping and the loss of most of your cash. Investing in a fund means spreading the risk so that even if one bank collapses, others should help your investment.

That's what Brian Dennehy, from Dennehy, Weller & Co, recommends: "There is a lot of uncertainty around the long-term profitability of the banks, even though there is scope for positive surprises in the short term. I rather favour corporate bonds issued by banks, where you only need the banks to survive to make money, whereas shares rely on the banks not just surviving but also thriving."

He says it is difficult for private investors to access these bank bonds, so the best way is to buy a fund with a heavy concentration in banks. "I would choose Old Mutual Corporate Bond which has an estimated distribution yield of 10.1 per cent. With the average price of the bonds held by the fund being just 77p, it implies capital growth potential of 30 per cent in addition."

Adrian Lowcock, from Bestinvest also favours funds with a financial focus. "Given the complexity of banks' balance sheets and the difficult economic climate, investors should consider investing in financials as a long-term strategy and seek to diversify. I recommend getting exposure via Jupiter Financial Opportunities, run by Philip Gibbs," he says.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
TVShow's twee, safe facade smashed by ice cream melting scandal
Arts and Entertainment
tv
Arts and Entertainment
Lisa Kudrow, Courtney Cox and Jennifer Anniston reunite for a mini Friends sketch on Jimmy Kimmel Live
tv
Life and Style
tech
PROMOTED VIDEO
News
Actor, model and now record breaker: Jiff the Pomeranian
Video
News
REX/Eye Candy
science
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
News
i100
News
Down time: an employee of Google uses the slide to get to the canteen
scienceBosses are inventing surprising ways of making us work harder
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    PMO Analyst - Risk - Banking - London - £350-£400

    £350 - £400 per day: Orgtel: PMO Analyst - Risk - Banking - London - £350 - £4...

    C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

    £40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

    C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

    £45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

    DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

    Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

    Day In a Page

    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone
    Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

    What is the appeal of Twitch?

    Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
    Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

    How bosses are making us work harder

    As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
    Manufacturers are struggling to keep up with the resurgence in vinyl records

    Hard pressed: Resurgence in vinyl records

    As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
    Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

    A tale of two writers

    Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
    Could a later start to the school day be the most useful educational reform of all?

    Should pupils get a lie in?

    Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
    Prepare for Jewish jokes – as Jewish comedians get their own festival

    Prepare for Jewish jokes...

    ... as Jewish comedians get their own festival
    SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

    A dream come true for SJ Watson

    Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
    10 best cycling bags for commuters

    10 best cycling bags for commuters

    Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
    Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

    Paul Scholes column

    Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
    Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

    Kate Bush shows a voice untroubled by time

    A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
    Robot sheepdog technology could be used to save people from burning buildings

    The science of herding is cracked

    Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
    Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

    This tyrant doesn’t rule

    It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?