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: www.fool.co.uk

ASK THE 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 UKColumn@fool.com or post to Motley Fool, 79 Baker Street, London W1M 1AJ.

MY DUMBEST INVESTMENT

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 @fool.com or post to Motley Fool, 79 Baker Street, London W1M 1AJ.

FOOLISH TRIVIA

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@ fool.com or post to: Motley Fool, 79 Baker Street, London W1.

n Last week's answer: Sun Microsystems

Sport
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
Sport
Robin van Persie hands his third-place medal to a supporter
Van Persie gives bronze medal to eccentric fan moments after being handed it by Blatter
News
Ian Thorpe had Rio 2016 in his sights
people
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
News
scienceScientists have developed a material so dark you can't see it...
News
Monkey business: Serkis is the king of the non-human character performance
peopleFirst Gollum, then King Kong - now the actor is swinging through trees in Dawn of the Planet of the Apes
Arts and Entertainment
Blackman: Landscape of children’s literature does not reflect the cultural diversity of young people
booksMalorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Life and Style
Once a month, waistline watcher Suran steps into a 3D body scanner that maps his body shape and records measurements with pinpoint accuracy
techFrom heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
News
Soft power: Matthew Barzun
peopleThe US Ambassador to London, Matthew Barzun, holds 'jeans and beer' gigs at his official residence. He says it's all part of the job
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
News
Gavin Maxwell in Sandaig with one of his pet otters
peopleWas the otter man the wildlife champion he appeared to be?
News
Rowsell says: 'Wearing wigs is a way of looking normal. I pick a style and colour and stick to it because I don't want to keep wearing different styles'
peopleThe World Champion cyclist Joanna Rowsell on breaking her collarbone, shattering her teeth - and dealing with alopecia
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

Otter man Gavin Maxwell's bitter legacy

The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

Joanna Rowsell: 'I wear my wig to look normal'

The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

Bill Granger's quick and delicious marinades

Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

Anyone but Argentina – why Brazilians don’t love their neighbours any more

The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

The Open 2014

Time again to ask that major question - can Lee Westwood win at last?