David Kuo: If you're attracted to banks, choose the good, not the bad or the ugly
Sunday 26 February 2012
The question that I am asked most often about investing at the moment is whether banks are a good investment. It isn't hard to understand why many private investors have been drawn to banks. Anyone who picked up shares in Barclays when they fell to a low of 51p in 2009 will be laughing all the way to the... bank.
The shares have gained 382 per cent. In other words, a £10,000 investment would have turned into £48,200. These are the kind of explosive returns you would expect from speculative oil explorers, dicey miners and chancey prospectors, not from banks.
So, it is understandable why many private investors are wondering if Royal Bank of Scotland and Lloyds Banking Group could repeat Barclays' trick and stage dramatic recoveries. They might.
However, before we take a punt on banks, it is advisable to get to grips with their complex accounting systems. Unfortunately, even at the best of times, banks behave like sausage machines. Money goes in one end and, mysteriously, money emerges from the other end in the form of bonuses for executives and dividends for shareholders, if we are lucky.
Most people will agree that the financial accounts of banks are at best messy and at worst totally unfathomable even for people who are supposed to be experts. If the experts were half as good as they think then we would not be in the financial mess we are in now.
You only have to look at the profit forecasts for Lloyds Banking Group to see how confusing it can be. For instance, City analysts had reckoned the bank could either report a profit of £3bn or a loss of £890m this year. On Friday, we learnt that the part-nationalised bank had lost £3.2bn, largely due to claims relating to PPI mis-selling. How on earth can anyone make a sensible investment decision when the forecasts range from a healthy profit to an unhealthy loss?
There is another issue and it concerns the long-term total return from bank shares. The total return comprises capital appreciation, which is when shares rise over time, and reinvested dividends. Unfortunately for banks, the total returns show a divide between banks that have amply rewarded shareholders and those that have comprehensively destroyed value.
Standard Chartered has been a stand-out performer over the past 11 years. It has delivered a return of 174 per cent, which equates to an annual return of 9 per cent. Put another way, a £10,000 investment in Standard Chartered in 2000 would be worth around £27,400 today with dividends reinvested.
HSBC's return has been less impressive but nonetheless positive. A £10,000 investment in HSBC would be worth £11,900 or 1.4 per cent a year. Lloyds has destroyed 85 per cent of shareholder value and RBS investors have seen their investments collapse by 90 per cent.
The total returns speak volumes but there is something less tangible that investors should consider. This is stewardship, or how bosses treat their shareholders. The should be transparent, communicate with shareholders openly and aim to keep salaries and bonuses at reasonable levels. One measure of reasonableness is to only consider bonuses if shareholders have been rewarded with acceptable long-term total returns. In other words, bosses' rewards should be in line with shareholder rewards.
In difficult times companies with good stewardship can distinguish themselves with exemplary behaviour. Over the next few weeks look at the way banks reward their bosses. Are they eating from the top table while shareholders are made to beg for scraps?
Then ask yourself if you would entrust these people with your money because as a shareholder you are a part-owner of the business. That should provide a useful clue as to whether a bank is worth investing in.
David Kuo is the director of the financial advice site fool.co.uk
- 2 Mystery man who gave mum heart-warming note on train 'wanted to put a smile on her face'
- 5 Amal Clooney gives excellent answer to fashion question at European Court of Human Rights
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
Louise Mensch says 'F**K YOU' in explosive tweets about David Cameron, Saudi Embassy and the Queen over King Abdullah tributes
iJobs Money & Business
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village