Money - The latest news from The Motley Fool: Is there cash in banks?

The Motley Fool started as an investment newsletter and has become one of the most popular personal finance and investment websites. Anyone who follows its philosophy is called a `Foolish investor'.

Shares in Britain's high-street banks have been doing rather well since the fall they suffered last October; all of the old "Big Four" have seen some decent rises. Since that bleak month, Barclays shares have doubled in price and Lloyds TSB is up 40 per cent. HSBC has beaten them all, having more than doubled since that October low point, while NatWest has put on more than 30 per cent.

Is the banking sector overvalued? A number of observers believe it now is. Some see the sector as being cyclical, and believe that a downwards spell is inevitable before too long. They see the increasing amount of consolidation in the banking industry as evidence of a forthcoming end to the recent banking mini-boom.

The latest planned takeover in the sector, announced a week ago, took many by surprise. Of the big banks, Lloyds TSB has the reputation of being rather acquisitive, and people pretty much expect to see takeovers by the company on a fairly regular basis. It last did this in June, with the buy-out of Scottish Widows, and it looked like it might be about to do it again after rumours circulated about Legal & General. This rumour, which we will come back to later, turned out to be wrong, but it did force the genuine predator, in the shape of NatWest, to show its hand. The confirmation of that proposed deal brought a lot of "me too" investors out of the woodwork, and shares in other, smaller banks and insurance companies rose sharply immediately afterwards, in the hope that they too might become takeover targets.

What has fuelled the takeover and merger fever in the otherwise sedate world of banking and finance? For one thing, with a growing number of new Foolish investors shaping their retirement plans around stock market investments, there are more and more people looking for growth in the businesses that they buy bits of. The days of shareholders sitting back, happily accepting their dividends every year, and putting no pressure on the management of their companies are pretty much behind us. Freer competition in the sector, the growth of telephone and internet banking facilities, and the emergence of a number of new upstarts has also shaken the old world a lot, and they have to become lean and mean to stay ahead.

But when it comes to growth, it is hard for banks to achieve it organically for any great length of time. Organic growth is simply growth in the existing business, and it is achieved through the increasing turnover that comes from selling more products to more customers, and through raising profitability via cost savings and increased efficiency. Growth these days, at least for the big banks, means acquisition, and a subsequent expansion into other areas of the financial services industry. With the demutualisation of so many building societies and insurers over the past few years, there is no shortage of targets for takeovers.

However, the prices paid for takeovers seems to be rising, and the value NatWest is placing on Legal & General - on the face of it - doesn't make it look like much of a bargain.

The part paper bid (which just means that it'll be paid for partly in NatWest shares) initially valued L&G at around pounds 10.7bn - probably more than twice its worth - based on the net value of its business.

NatWest is clearly expecting healthy future profits to arise from using common sales channels for products and from efficiency savings via synergies. Even so, the deal is only likely to produce a return on investment of around 5 per cent, and you could get that with much lower risk by putting your money in a savings account.

So is the banking sector overvalued? Well, there is certainly evidence that valuations are high by historic standards. Valuations mooted for takeover deals are increasing, and that might not be stomached by the predators' shareholders for much longer.

NatWest's share price, for example, has fallen since the bid was announced, thus devaluing the takeover offer.

On the other hand, banking technology is improving rapidly and competition for our savings and for our insurance premiums is hotting up. Investors and savers are also becoming less tolerant of the huge commissions charged on many financial products, and a move towards more direct, and lower cost, selling is inevitable.

There will be some long-term winners in the banking and finance sector for those who are patient, but Foolish investors need to weigh the balance. We should always be wary of paying too much for an investment, if we cannot see where the future profits are going to come from to justify the price.

And that rumour we mentioned earlier, that an offer for L&G was in the pipeline? That was triggered when L&G's share price rose 10 per cent on the day before the bid was announced. An investigation into possible insider dealing is likely to be instigated. Insider dealing, being tantamount to theft, is illegal - and is to be despised by all honest investors.

n Motley Fool:


Are there any predictable patterns in the stock market over the course of the year, and is it better to invest at certain times rather than others?

VS, Hants

The Fool responds: It is tempting to think that we can see patterns emerging over the years, but we often read more into statistics than we logically should, and, therefore, see patterns where there is really only randomness.

Over the long term the small fluctuations we see become meaningless anyway.

At the Motley Fool we firmly believe that the best time to invest is whenever you have saved enough for your next investment.

n If we publish your question, you'll win a Fool baseball cap. E-mail or post to Motley Fool, 79 Baker Street, London W1M 1AJ.


I bought some Pizza Express shares at just under pounds 8 in July. I was then disappointed to see them fall sharply last month and sold out at 715p to cut my losses. After that they fell a bit further, but the price has now come back up to almost what I paid for them. Selling when I did was dumb, but how could I have known?

LV, London

The Fool responds: Making your buying and selling decisions based on short-term price changes is definitely not Foolish. Foolish investors base their decisions on the long-term prospects of their companies and ignore the short-term "noise" created by day-to-day price movements.

n Send us your smartest or dumbest investment story. If we publish it, you'll get a free copy of our investment guide. E-mail to UKColumn or post to Motley Fool, 79 Baker Street, London W1M 1AJ.


The first five correct answers out of the hat win a black Fool baseball cap.

Which UK hi- tech company reported last week that its profits had risen over 100 per cent, but saw its share price crash by 10 per cent the same day?

n Answers by e-mail to: UKColumn@ or post to: Motley Fool, 79 Baker Street, London W1.

n Last week's answer: Sun Microsystems

A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Life and Style
A small bag of the drug Ecstasy
Life and Style
Floral-print swim shorts, £26, by Topman,; sunglasses, £215, by Paul Smith,
FashionBag yourself the perfect pair
ebookA unique anthology of reporting and analysis of a crucial period of history
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
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.

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup