UK banking sector report
By Richard Hunter | 02 Sep, 2008
As RBS brought the interim reporting season to a close, investors were left to reflect on a two-week period in which all of the major UK banks provided their half year numbers, most reported a sharp decline in profits and RBS even fell into the red for the first time in its quoted history.
As the dust begins to settle and the comparisons are made, there will likely be a return to the banking psychology of old from an investment perspective – prudence and vigilance on any rising debts.
There was also ample evidence of the markets current mindset. In any other circumstances the reaction to these (largely) poor figures would have been a mauling of the share price. However, such were the jitters leading up to the reports, a number of the shares actually rallied since the figures were indeed bad – but not as bad as they might have been.
Even so, this brief rally has done little to mitigate the share price damage of the last year or so, as shown in the table below. There remains something of a perception that perhaps we have been here before, with the worst of the writedowns behind us, only for the likes of Merrill Lynch, Citigroup or UBS to declare another set of bumper impairments. As such, until the credit fallout can be said to be behind us for sure, it will be difficult for any of the banking shares to move on in any meaningful way.
Indeed, the worst scenario is that such writedowns continue – prompted in the UK perhaps by the deteriorating economy and the ongoing weakness in the property market – resulting in a further call on cash as the banks’ capital ratios come under pressure. If this were to happen, there would then be the unpalatable possibility of some further rights issues to bolster the banks’ balance sheets – news that would be grimly received by the market.
This is one of the reasons why the banks largely unaffected by these concerns (in share price terms at least) are those who still have some exposure to slowing economies and the credit fallout, but also have more of an exposure to the still burgeoning Asian economies. As such, despite its own difficulties in the US, HSBC has limited its annual loss in terms of the share price to 6.8%, whilst what has been the darling of the sector for some time, Standard Chartered, has posted a decline of just 3.2%.
Share price performance over one year (at 27.8.08) | Market Consensus | |
| Standard Chartered | -3.2% | Buy |
| Barclays | -45.9% | Stong Hold |
| RBS | -55.5% | Hold |
| Lloyds TSB | -46.3% | Hold |
| HSBC | -6.8% | Hold |
| HBOS | -66.9% | Weak Hold |
So, where next for the banks?
There seems little doubt that those who enjoy both geographical and product diversification will be better prepared to weather any storms ahead. At the same time, though, an attitude of prudence and risk aversion will inevitably eat into the healthy profit margins which the banks have enjoyed for some time now. There is also the possibility of rising bad debts as the economy weakens further, so opinion is very much divided as to whether the banks have fallen enough for this to be the time to re-enter the sector.
On the other hand, of course, with this generally weak set of numbers out of the way, future comparatives become that much easier. That simply leaves the question of the banks themselves keeping a strong lid on further writedowns whilst continuing to attempt to grow their businesses to at least a fraction of the strength they previously enjoyed.
The overall general feeling remains – as with the wider market perhaps – that there may yet be some falls to come before valuations become so compelling they cannot be ignored – at which time the wall of cash currently on the sidelines will be back in force. That time, it appears, is not yet with us.
For our reactions to the announcements on the day they were made use the following links:
