The unveiling of the rebranded TSB branches may have brought on a flush of nostalgia for those of a more sentimental nature, but lest we forget the bank’s sale was a condition of a government bailout some years ago.
A recent study by Nottingham University estimates that the UK has lost 40% of its bank and building societies since 1989, though there’s no mention of the debts written off and falls in the banks’ share prices in the wake of the credit crisis.
Elsewhere, a consumer confidence survey by CISI found that more than half of respondents pointed to a low level of confidence in banks being the number one stumbling block to their continued recovery.
The underweight tag
Naturally, this cynicism is most evident in stock pickers, many of whom still wear the ‘underweight financials’ tag with pride. For example, Jeremy Lang of Ardevora UK Equity and UK Income funds, is one of those who says he has maintained a zero weighting in financials aside from a holding in the London Stock Exchange.
Bill Mott of PSigma Income Fund, is another who has been vocal about being underweight banks, except HSBC (“the bank to own if you don’t like banks”).
As he said earlier this summer: “We expect that there are still more bad loans yet to be recognised. As Mervyn King pointed out, the banks have recognised the bad debts they can afford to, not what they need to.”
Unsurprisingly, Guy de Blonay, manager of Jupiter Financial Opportunities Fund, is more positive on the banking sector pointing out that the MSCI AC World Financials Index is up significantly from its post-Lehman low point in March 2009.true
Regulatory milestones, such as the Dodd Frank Act in the US and Basel III rules that forced global banks to adopt stricter capital and liquidity requirements, have helped guard against another bank failing. In the UK, changes to the way banks are supervised and new legislation that will see retail banking ring-fenced from investment banking activities, have placed a tighter leash on the sector.
A transformation
“Five years on, better policing by politicians, regulators and the banks themselves have, in our view, transformed the way financial institutions go about their business,” says de Blonay.
However, he is not blind to challenges ahead: “Even if the nascent economic recovery bodes well for the sector, the global imbalances sparked by years of ultra-low interest rates could prove tricky to negotiate while the issue of banks that are ‘too big to fail’ has yet to be fully addressed.”
It would be naive to suggest investors haven’t made money from the banking sector over the past five years, and it would be equally wrong to assume the sector cannot once again return to the heights it did before the Lehman collapse, despite regulatory shackles.
As Andrew Bell, AIC chairman and chief executive of Witan Investment Trust, makes clear, however bleak the outlook seems, usually the world finds a way to muddle towards a solution.
“Unlike the high streets, where lower prices encourage bargain hunting, sellers in financial markets tend to multiply after market falls and buyers abound after a rise,” he says.
“Nobody sounds a gong at the top or the bottom so there is no substitute for doing your own research in assessing whether to take investment risk or reduce it.”
