Time to look again at our unloved banks

A change of heart could reap rewards for investors

YOU will find it difficult to pick a sector less loved by investors than the oncemighty British banks.

humbled by the financial crisis, bailed out by taxpayers and weighed down by PPI, our high Street lenders have been unpopular for the best part of a decade now.

But – as their financial reporting season begins, with Royal Bank of Scotland announcing annual results yesterday and its major rivals due to follow suit next week – some onlookers believe it is time for a rethink.

Ian Gordon, a banking analyst at Investec, says: ‘Banks are generating higher earnings and higher dividends, and I expect a raft of share buy backs in the coming weeks and months.’

They certainly look like they could be a bargain. Most have endured precipitous share price falls since the start of 2008, before the crisis reached its nadir, with RBS down 94pc, Lloyds 82pc, Barclays 67pc.

Barclays and RBS are both at steep discounts to their ‘ book value,’ meaning the value the stock market is putting on their shares is lower than the assets they own.

THERE have been hundreds of thousands of job cuts, waves of branch closures and massive fines for everything from money laundering on behalf of Mexican drug lords to selling toxic mortgages.

PPI compensation alone has cost the industry £33.6bn – enough to pay for the first moon landing, with change left over to buy two new British aircraft carriers. But there are signs the worst of the pain is over, with a deadline for PPI complaints in August which should bring pay-outs to an end.

Meanwhile, impairments – losses from bad loans when customers cannot afford to repay them, the scourge of the banking industry – are not an issue at present.

‘Unemployment is at a 43-year low with scope to move lower this year, and that in turn should keep impairments lower for longer,’ Gordon says.

Taxpayers still own 62.3pc of RBS, a legacy of its £46bn bailout in 2008 after years of mismanagement, but the Treasury has pledged to cut this to zero by 2024.

The bank made a profit of £1.6bn in 2018, its second year in the black after a run of losses, and boss Ross Mcewan is increasingly positive about the future.

Lloyds, meanwhile, escaped from the taxpayer’s clutches in 2017 and is slowly regaining its reputation as a dividend-producing machine. It doled out an interim payment of 1.07p per share last year and is yielding almost 5.3pc – still down from the pre-crisis levels of 6.7pc.

Lloyds is heavily tied to the economy so could suffer if there is a Brexit downturn.

however, the biggest risk for investors might be that ambitious targets set by boss Antonio Hortaosorio could spark a return to the hard-driving culture that sparked past mis-selling scandals.

EXPERTS expect a profit of £8.4bn when it unveils 2018 results on Wednesday, up 58pc on the previous year.

At Barclays, bosses have made a virtue of the lender’s strong US presence and its investment banking arm. But shares remain stubbornly below where the board would like them to be, and has been disrupted by activist investor ed Bramson. Boss Jes Staley has even suggested that the bank needs another economic downturn to restore confidence in its ability to weather the storm. Profits of £ 5.6bn, up 57pc on 2017, are expected when results are unveiled on Thursday. HSBC – which is due to report results on Tuesday, with an 32pc rise in profits to £17.5bn expected – stands slightly apart from rivals because more than half of its income is earned in Asia, where it is the dominant Western bank. The lender is more of a play on the fast-growing Chinese economy than on Britain.

For the other three big lenders, the main concern is that Brexit uncertainty continues and takes a toll on the economy, hitting their profits.

Fierce competition in the mortgage market is also holding back returns, and spending on new technology is likely to ramp up as they fight off new online- only rivals such as Starling and Monzo. And just because bank share prices look low, that doesn’t mean they’ll recover any time soon.

Russ Mould, of stockbroker AJ Bell, says banks ‘pass all the stress tests to check financial stability which central banks can throw at them, but the share prices don’t want to rise’.

So banks remain – as they have done for more than a decade now – an unloved group of stocks.

But for those willing to wait for a rethink, there may be an opportunity to bag a bargain – and enjoy chunky dividend pay-outs too.