David Kuo: If you're attracted to banks, choose the good, not the bad or the ugly

Investment Insider

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

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

footballLIVE City face Stoke, while Warnock returns to Palace dugout
Life and Style
3D printed bump keys can access almost any lock
gadgets + techSoftware needs photo of lock and not much more
Paul McCartney backs the
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

    £35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

    DevOps Engineer (Systems Administration, Linux, Shell, Bash)

    £50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

    Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

    £60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

    Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

    £50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    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