BANKING ON BETTER TIMES
Last week was a difficult one for the banking sector. It's many years now since the banks were regarded as the cornerstone to an investment portfolio, with a reputation for solid performance and good yields. Of course this all changed with the banking crisis, but there seems little chance of recovery as the bad news continues to flow unabated.
The spotlight has been on Deutsche Bank in the last few days, as Berlin was forced to deny it was preparing a rescue and Mario Draghi was grilled by the Bundestag over the future of the bank. Anxiety over the European banks has been simmering for a considerable time, but escalated after the market turmoil following the Brexit vote.
The focus on Germany’s flagship bank intensified after the US justice department told the bank it was seeking $14 billion for mis-selling mortgage backed securities, rather more than had been anticipated. Shares fell sharply after hedge funds started withdrawing business from the bank triggering a statement from Deutsche Bank emphasising its strong financial position. Despite this, the share price has fallen by almost half since the beginning of the year.
Another bank under the microscope is Royal Bank of Scotland. Still with the majority in the hands of the taxpayer, it saw its share price react badly to the Deutsche situation, but truthfully it has struggled to make headway for some time now. Its share price is down by over 40 per cent since the beginning of the year and the news that the sale of Williams & Glyn has again run into difficulties – with Santander pulling out for the second time – has raised many questions about its future.
Elsewhere the rest of the UK banking sector has not had a good year either. Barclays has seen its share price struggle, down over 23 per cent over the year to date and Lloyds’ share price is down by over 25 per cent. The current low interest rate environment both in Europe and the US does not favour the industry and there seems little chance of a change in the short term. In addition, the increasingly stringent regulatory environment is taking its toll and banks regularly face more stress tests.
In contrast, somewhat bucking the trend, are HSBC and Standard Chartered. Standard is up over 11 per cent since the start of the year and HSBC is up over 8 per cent. Admittedly, Standard Chartered is seeing some recovery from a very low base after having languished for several years and as a predominantly Far Eastern focussed bank faces rather different challenges to banks in the west. HSBC is also a rather different group, being very much more global.
At the time of writing there seems little hope of a speedy recovery in the sector.The regulatory environment appears to be going one way only and there is no sign of interest rates going up by more than incremental amounts in the coming months or even years. Worries over the stability of European banks persist and it seems unlikely that the situation will change for the better in the short term.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
