“Barclays is currently paying about a third of its profits in dividend, so it is a bit further along. But ultimately it can get to the same position as Lloyds in the same time-horizon, and maybe even a bit sooner.
He continued: “The motivation behind holding HSBC is slight different to Lloyds and Barclays. It is more around the structure of the balance sheet – profits and dividends can rise, which is a theme for the broader financial sector.
“RBS is interesting as well. The government has announced its intention to start selling down some of its larger stakes, which is a sign of putting some of the issues of the past behind us.”
But is it a case of a clean sheet – albeit with some creases still to be ironed out – or are there more inherent issues?
Other side of the coin
“There are always going to be fragilities in the banking sector,” said Box. “It is a case of looking for the banks that are least vulnerable.
“Lloyds has the lowest cost base and is ahead of the others larger banks in terms of restructuring, so it is less distracted and can focus on its core businesses, which over time could result in meaningful dividend.
“Barclays still needs to build capital, and it is hard to see it becoming high-yielding stock in the near future, but for HSBC dividend is a key component of its investment story, given that capital growth is unlikely to be forthcoming.”
While Message and Box are on the same page when it comes to the state of balance sheets compared to pre-crisis, they are at loggerheads as to how much comfort this affords investors.
“If we look at the strength of banks’ balance sheets and their core equity ratios – leverage ratios are lower while equity ratios are higher – the capital buffers are in place to withstand future shocks,” said Message. “Never say never, but it seems that they are in a much better position that they were.”
Box countered: “Balance sheets are certainly stronger, and banks are less vulnerable than they were pre-crisis from a capital and liquidity perspective, but they are still levered organisations.”
Box believes that despite earnings being near operating levels, the sector is hamstrung by its susceptibility to regulatory measures.
