Bank shares shrug off a year of shame

shaRes in Britain’s biggest banks soared during the past year despite being rocked by a string of scandals.

In a major boost to long- suffering investors, state-backed Lloyds was the biggest riser in the Ftse 100 index – up 85pc.

It pipped Ftse peer fund manager aberdeen asset management, which jumped 73pc.

this was despite Lloyds setting aside another £1.38bn in compensation for payment protection insurance, taking its total provision to nearly £5.3bn.

scandal-hit Royal Bank of scotland was the fifth biggest climber, surging 60.8pc.

the bank, 82pc-owned by taxpayers, is expected to be hit with a fine of around £350m in the New year for rigging interest rates.

although the rebound is good news for taxpayers they are still sitting on a £23bn paper loss on the £66bn spent bailing the two lenders out.

the scandals that have caused the reputation of UK banks to sink to an all-time low caused only temporary dips to their market value.

there has been a feeling among investors that bank stocks had been so battered by the end of 2011 that they were bound to come back.

easing concerns about the break-up of the eurozone and the Government’s flagship Funding for Lending scheme to encourage financing have also boosted confidence among investors in British banks and pushed their share price up.

analyst Ian Gordon from Investec said the recovery is one of the ‘unintended consequences’ of Funding for Lending, which supplies banks with an unlimited source of cheap money if they lend more.

he said: ‘the scheme has done more to help banks’ funding costs but less to stimulate lending. this is good news for banks, neutral for the economy and bad for savers.’

the ready supply of cheap money from the Bank of england has caused banks to slash savings rates as they no longer need to compete to raise cash from customers.

But Gordon warned shares in RBs and Lloyds would fall again next year.

‘they are both overpriced. Banks’ ability to generate positive returns has not improved.’

Lenders are under pressure from regulators to raise more spare capital to protect themselves against future financial shocks.

this threatens to eat into any profits, prompting some lenders including swiss giant UBs to back their investment banking arms.

In another blow, high street lenders face a 24pc increase in the bank levy as the Government strives to hit its target of raising more than £2bn a year.

the chancellor said this would ensure banks don’t benefit from cuts in corporation tax in 2014.

It its autumn statement last month the treasury admitted it will raise just £1.8bn from the levy this year, £400m less than predicted.