It isn't all bad news for banks, and brave investors may find value there

The sector is finally beginning to rally, says Kate Hughes, though there are still problems ahead

Barely a week has gone by this year without a banking disaster story. With just one exception, the latest reports from the UK banks have shown significant declines in profits. Desperate measures have been taken to get the cash flowing again. Assets are being sold off and three UK banks have called upon investors for £17bn of new capital.

Over the last few weeks, however, the banking sector has started to rally, despite ongoing concerns over liquidity, capital and the state of the economy. So can it get worse, or have we hit bottom? Is now the time to dive back into banking and pick up a few bargain prices, or is more bad news in the pipeline?



Optimistic view

At first glance, the latest results from the banking sector have been catastrophic. Royal Bank of Scotland (RBS) recently announced pre-tax losses of £691m for the first six months of 2008 alone, after being hit by credit-crunch write-downs of £5.9bn. The losses were not, however, the billions of pounds that analysts had predicted, and the bank's share price actually rose in value at the news.

"Recent weeks have certainly seen a mixed bag of results for banks," says Nick Raynor, an investment adviser at The Share Centre. "Although RBS's losses were huge, they were not as bad as expected, and the company has gone some way to sure up its debts.

"Shareholders who backed the banks' rights issues are likely to be smiling the most, as they are currently showing a near-20 per cent profit. And investors in RBS, Lloyds TSB and Barclays should be encouraged by their decision to not cut dividends."

A calmer future may be on the cards as the results season winds down. "Rights issues have caused a lot of technical activity, driving the prices down," says James Lowen, senior fund manager for JO Hambro. "Now this has finished, the effect has unwound, and that should help clam the volatility we have seen recently."

And of course, there's nothing like a crisis to encourage organisations to do some work behind the scenes. "We have passed the period of write-downs, and most of the capital problems, because of the work the banks have done to raise money," adds Lowen. "This all means that the improved trends we've seen in the last few weeks should continue."

Many argue that the effects of an economic downturn have already been taken into account in the banks' share prices. Being burnt by the US sub-prime crisis, and the slowdown in the UK, means that many banks have dramatically reduced their exposure to risky business, like high loan-to-value mortgages.

"Being able to cherry-pick risk will filter through to performance and profits," says Henk Potts of Barclays Wealth. "Profitability of the banks will be key over the next two or three years. It is all about looking through the negative market sentiment and getting back to fundamentals."



Pessimistic view

It is difficult to call the end of the problems in the banking sector, Potts admits. Write-downs are difficult to forecast, and there is no doubt that, despite preventative measures for the future, the banks' problems have been exacerbated by the fall in the housing market and the slowing economy.

"Investing in the banks is still a high-risk option," says Richard Robinson of investment manager Ashburton. "Sentiment could easily turn again, inflation could rise, and there remains a lack of transparency in the sector. You could argue that this is cheap time to buy into the banks, but it's like someone trying to sell you a car very cheaply that they won't let you see."

If you feel that there are bargains to be had, go for an investment with clear diversification, the experts advise. When investing directly, stay away from niche operators, warns Potts, such as those only dealing in buy-to-let mortgages, for example. "We favour banks with Asian exposure, like HSBC and Standard Chartered, which reported a 31 per cent jump in profits in the first half," he adds.

"There is a lot to dispute about the recent talk that better-than-expected results from the banks mark a turning point for the sector," says Darius McDermott of Chelsea Financial Services. "We would only recommend that investors take the plunge should the banks begin to show some momentum, not relatively minor share-price bounces. In this environment, investors should avoid being blinded by false dawns."

For those brave enough, he suggests the Henderson UK Equity Income fund and Psigma Income fund. Around 11-13 per cent of their holdings are in banks – most significantly, RBS and HSBC.

Another way to get exposure to the financial sector is to consider specialist funds such as the Jupiter Financial Opportunities fund and New Star Financial Opportunities fund. These funds have avoided the UK banks, but invested in other financial stocks across the globe.

Unless you're a sophisticated investor, it's worth getting financial advice before taking the plunge. To find an independent financial adviser in your area, visit www.unbiased.co.uk.

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

PROMOTED VIDEO
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave long-running series
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
voices
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
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

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam