Wednesday, 5 March 2014

Bail on your bank shares! Buy insurance, real estate instead

Look at the widening gap between financial sectors

I think this first chart gives you a good idea of why I am not keen on UK-listed banks at the moment – the stock market has been falling out of love with them over the last 10 months, following a series of frankly poor results (Figure 1).

If you had been invested in the UK Banks sector (HSBC, Barclays, Lloyds TSB, RBS, Standard Chartered) since January of last year, you would today have seen precisely zero price appreciation on average to today – your only gain has been in dividends paid.

Contrast this with the stellar performance of two other UK financial sectors: Insurance and Real Estate, both of which have gained around 30% over the same period. That is a big difference!

 But there are of course some very good reasons for the relative under-performance of Banks – most notably from:

  1. Their poor sets of results, generally missing analysts’ estimates for profits and earnings;
  2. The ongoing sagas of tighter banking industry regulation and also continual provisions for the costs of various mis-selling and price-fixing scandals, which seem to linger like a bad food odour and taint the industry.

Banking scandals do not go away

I haven’t got enough space in this short article to list all the “bad stuff” that the banks have been caught doing over the past few years – just note that we now have a potential Gold price scandal centred around the daily London pm gold price fix, which involves Barclays and HSBC amongst others.  So this latest scandal can potentially be added to the long list of issues that the banks are already paying for, in the form of fines and compensation to victims.

And bank results have not been good

On the results front, these have been somewhat disappointing; even today Standard Chartered has announced results, another bank undershooting analysts’ profit forecasts for end-2013 (net income reported of $3.99bn versus an average analyst estimate of $4.25bn).

UK banks, particularly those like Barclays, HSBC and RBS that still retain substantial investment banking activities are struggling to bring down costs (principally salaries) sufficiently to reach their targeted cost-income ratios (a measure of banking efficiency). Put simply, if they do not pay high salaries and bonuses to investment bankers who are performing well, these employees will simply jump ship and work elsewhere. And an investment bank is really the sum of its talented individuals – if they all leave, what value is left?

To read the rest of this article, see the charts and my UK large-cap stock recommendations in Financial sectors, click on the link below:

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