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
Saturday 16 August 2008
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?
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."
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.
- 1 Malaysia Airlines MH17 crash: Pro-Russian rebel 'admits to shooting down plane'
- 2 Israel has discovered that it's no longer so easy to get away with murder in the age of social media
- 3 Israel-Gaza conflict: The myth of Hamas’s human shields
- 4 Amy Winehouse unpublished 2004 interview: ‘Ten years from now I’ll be 30, so I’ll maybe have one baby’
- 5 Dutch paedophile club to fight their ban at the European Court of Human Rights
Malaysia Airlines flight MH17 crash: 'Nine Britons, 23 Americans and 80 children' feared dead after Boeing passenger jet is 'shot down' near Ukraine-Russia border
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...
£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...
£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...
£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...
Day In a Page
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
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar