The Week In Review: Banks are a long-term cash machine

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The UK's big banks notched up profits of £30bn between them in 2004.

The UK's big banks notched up profits of £30bn between them in 2004. While a windfall tax is unlikely, profits might be worn down by demands for more customer-friendly policies on cheque clearing and the like. This risk comes on top of the usual competitive pressures in a dynamic retail banking market - and on top of the risk that the market for personal loans and mortgages is slowing.

One oughtn't to be too short-termist about the banking sector. Most shares don't look expensive, and by reinvesting dividends from these high-yielding stocks, total returns can be large over the long run. Much of the sector deserves a "long-term hold" tag, Barclays and Royal Bank of Scotland chief among them.

The two emerging markets players, HSBC and Standard Chartered, offer long-term investors exposure to India and China, and although the shares are valued more highly than UK-focused banks, that is fair.

Banks focusing almost solely on the UK might look unenticing because, with house-price gains fading and pension fears looming, the consumer debt boom is coming to an end. Alliance & Leicester's results showed it losing market share in mortgages, and even its 6 per cent dividend isn't enough to make up for the risks of investing in a bank with shrinking revenues. It is an outright sell. Northern Rock looks at risk, too, so take profits.

Lloyds TSB, though, ought to be able to offset competitive pressures by selling more financial products, and it has a recovering life-insurance business in Scottish Widows.

HBOS, meanwhile, is the young Turk of the sector, winning market share thanks to its positioning as a low-cost rival to the Big Four. With the promise of extra cash returns to shareholders as well as further organic growth, HBOS shares have progress still to make.


Trafficmaster makes money selling its satellite navigation system to car drivers (or to car manufacturers who are now installing the kit as standard in 11 models) and harvesting subscriptions to its call centre-based route planning services. The jury is still out on whether its system will win out against bigger electronics players, and on whether it has the legs to expand beyond the UK. But for now, things are looking up - and this volatile share is, too.


Group 4 Securicor is one of the world's largest transporters of money, from cash machines and commercial premises, often under armed guard. But it doesn't make much money for itself. The profit margin is wafer thin on all its services: from cash handling, from "security systems" such as transporting prisoners and running prisons, and especially from its main business of manned guarding of premises. Take profits.


This fascinating biotech has enough cash to pay for a big trial of a drug that might treat MRSA, the hospital superbug, and to build a sales force to market its more advanced treatment for a dangerous blood-borne fungal infection. Unfortunately, it is hard to justify a £200m market value for the company on current sales projections. Avoid.


Gyrus describes itself as a "laser razor blades" company, providing hi-tech keyhole surgery equipment, machines and blades that can cut and seal tissue as they go. It is a small player in a giant market, but it is navigating the bumpy road from development-focused start-up to significant player in the lucrative US hospitals market. Buy.


Greggs the baker is on a roll. It is venturing away from its northern heartland and is on course to increase its estate from 1,250 to more than 1,700 by 2010. Bakers Oven, its premium brand with in-store bakeries, is back on track and we see no reason to stop guzzling the shares.


The new enlarged firm certainly has scale, but it will be several months before shareholders can be sure the merger with Isis was the right move - several major clients moved their money. There will be cheaper opportunities to buy.


The former builder, now turned capital projects and support services group, has a strong order book and is expecting to return to decent profit growth after two profit warnings. There is upside in the shares, which trade at a 25 per cent discount to peers such as Carillion and over time should move to a similar rating. Buy for recovery.


The snowy start to so-called spring has not been kind to clothing retailers. House of Fraser said its sales plummeted because of the recent chill, but it was confident people will soon start to restock their summer wardrobes. The trouble is the retail environment is getting tougher. House of Fraser has yet to prove that its push into branded fashion will see it through tougher times. Avoid.

Provident credits overseas growth

Consumer borrowing topped a trillion pounds for the first time last year, but Britain's debt explosion has not done much for the bottom line at the doorstep lender Provident Financial.

All of its profit growth is being achieved overseas. In the UK, the market for credit is phenomenally competitive. Even though Provident competes at the more risky end of this business - for borrowers with below-average credit ratings - many mainstream lenders are expanding into this sector.

It is facing an Office of Fair Trading inquiry, following a complaint from the National Consumer Council, which claims low-income borrowers are being overcharged by such companies. Diversification in the UK is helping, to a limited extent. Provident's motor insurance subsidiary unveiled improved profits by 21 per cent last year, but Yes Car Credit fared badly.

That leaves international expansion as the company's best source of growth. A new venture in Mexico is in its earliest days, but there are reasons to be optimistic about Eastern Europe. Provident's first overseas venture, in Poland, is now performing strongly, as is the one in the Czech Republic. The nascent Hungary and Slovakia divisions made a profit for the first time last year.

But these emerging economies are not without their risks, and with Provident's home market looking so challenging, the shares are high enough.

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