Have Britain's Banks Come Good?

THE WEEK: In the past, banks had little concern for customers or shareholders as long as they were making money, but things are beginning to change

Rodney Hobson 1 November, 2013 | 10:16AM
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If you say something often enough it will surely be true one day. I have thought that banking had finally turned the corner on so many occasions that I hardly dares to say it, but… I think banking may have finally turned the corner.

As Nick Leeson exposed when he drove Barings to bankruptcy, the people in charge of banks had little concern for, or knowledge of, what was going on lower down as long as the activities were making lots of money. That was compounded by the proliferation of compliance departments that have, perversely, conspired to produce practices ranging from bad form to downright fraud.

Each time it looked as if the banks had finally come clean, another misdemeanour has crawled out from under the counter and the banks continue to pay back what they wrongly took. There is now genuine hope that the process is coming to an end, although it is by no means over, with the possible manipulation of foreign exchange rates emerging this week.

Lloyds Bank (LLOY) is still paying for payment protection insurance mis-selling, the last scandal but one. It has slung another £750 million into the pot, taking its total provision to £8 billion. It seems that claims have come in thicker and faster than the bank expected, which just goes to show how little control the banks had over their activities.

Lloyds is also still writing down the value of businesses that it has sold off. Again, one wonders why the bank did not write off values more realistically at an earlier stage.

This should not, however, entirely detract from a near doubling of underlying profits at Lloyds to £1.5 billion in the third quarter compared to the same three months of 2012. It means profits for the first nine months have seen a turnaround from a loss of £607 million last year to a profit of £1.7 billion so far this year.

Significantly, Lloyds is slowly building hopes that it can start paying dividends again. It also seems likely that more shares will be sold next year by the government, which has already reduced its stake from 39% to 33%. The share price will inevitably be dampened until this overhang is removed.

Barclays Bank (BARC) has likewise announced an improvement in profits, from £962m in the first nine months to 2012 to £2.85bn this time.

It has, unfortunately, spoiled the effect by revealing yet another potential scandal as it reviews how its currency trading operated over the past few years.

The worst performer is Royal Bank of Scotland (RBS), where the government will have difficulty in dumping its majority holding unless results get markedly better. The decision not to split off a bad bank as a separate entity is probably right for the long term but RBS continues to make a loss.

Michael Hewson, senior market analyst at CMC Markets, says the UK banking sector as a whole has had a fairly positive year to date, buoyed by the improving UK economy and the Government’s ‘Help to Buy’ scheme.

He reckons it is hardly surprising that the state-owned banks have posted some of the better share price gains so far, given that these stocks have been the most beaten down over the last five years, with Lloyds ‘the standout performer boosted by a return to profitability and by government plans to significantly pare down its stake significantly.

Lloyds’ share price has quadrupled over the past two years and I would normally be reluctant to buy into any company at four times the price I could have paid but this is a quadrupling from a very low base.

CMC calculated in mid-week that this year Lloyds is up over 60%, RBS 14%, Barclays 11% and HSBC 5%.

It says: ‘The performance of RBS is still pretty decent, but unfortunately the recent turmoil at the top of the bank with the departure of the CEO, Stephen Hester, the uncertainty surrounding the good bank, bad bank question, and the competing demands of its major shareholder point to a bank without a clear strategy.’

He said that before publication of the RBS results, which certainly bore out his point about lack of a clear strategy.

My view is that Lloyds is still probably the best bet at current share prices and RBS, with a far bigger overhang of government-held stock, the worst. Barclays is somewhere in the middle, with much depending on whether it gets hit with a hefty fine 32in the US over the forex dealing.

A Promising Smaller Company

I promised readers of this column I would feature promising smaller companies from time to time and geoscience services group Getech (GTC) has been brought to my attention. It specialises in providing data, studies and services to the oil, gas and mining exploration sectors.

Results the year to 31 July show revenue up 24% to £8 million and pre-tax profits 80% ahead at £2.25 million. Unlike many small companies struggling with debt, Getech increased its cash levels, including fixed term deposits, from £3 million to £4.86 million.

The final dividend is doubled to 1.6p, and so is the total, to 2p. This is well covered by earnings per share of 5.57p. Getech intends to continue its policy of progressive dividends.

I like companies that increase revenue, profits, cash and dividends, though potential investors should be aware that Getech is only a couple of years into a turnaround story. I also think that oil and gas is a good sector to be in and there are plenty of niches for small specialist companies.

As always, readers should do their own research and make their own decisions. The shares have doubled this year to top 90p so a lot of good news is in the share price.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC214.73 GBX-0.03Rating
GETECH Group PLC30.30 GBX-3.81
Lloyds Banking Group PLC55.67 GBX0.97Rating
NatWest Group PLC253.40 GBX0.00Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.