Banking on the future

SINCE the financial crisis of 2008 it's been a long hard road to recovery for the beleaguered banking sector. There's been modest progress for some, notably Lloyds, where part of its government stake has been sold off (so far £16 billion has been recouped as compared with the original bail-out cost of £20bn) but the Royal Bank of Scotland still remains mostly under public ownership and progress here has been very gradual.

Last year we saw dramatic falls in the Asian facing banks (notably Standard Chartered and HSBC) as emerging markets suffered from fears of a slowdown in growth and the downturn in oil and gas prices.

However, the vote to leave the EU has thrown the whole sector into confusion and the modest progress has been abruptly reversed. Less than four weeks later there is a great deal of uncertainty surrounding the banking sector: the financial services sector was one of the worst hit by share sell-offs but some were hit to a greater extent: the domestic banks in particular have seen their share prices plummet and the ratings agencies have cut their outlook for most of the UK major banks from stable to negative.

Immediately after the Brexit vote the governor of the Bank of England acted swiftly in an effort to reassure markets, cutting the rainy day fund banks are required to hold in addition to the minimum capital requirements, in order to free up capital and encourage lending (though there is of course no guarantee that this will result).

The impact on the banks varied widely: the domestically orientated banks were hit hard in the immediate aftermath, with Lloyds opening 29.3 per cent lower, Royal Bank of Scotland was down 34.1 per cent and Barclays was 29.9 per cent lower. In contrast, HSBC was down 4.8 per cent and Standard Chartered was 15.6 per cent lower.

The banks are in much better shape than in 2008, but the big question is how to keep the money rolling in. The three “domestic” banks (Lloyds, Royal Bank of Scotland and to a lesser extent, Barclays) have an increased reliance on retail banking which in itself does result in subdued returns.

With the likelihood of a fall in interest rates the scope for margins is under even more pressure. In addition, the post Brexit uncertainty has thrown up many predictions of a downturn in the UK property market, which would also have a significant impact.

Clearly the banking sector does not operate in isolation and problems in the banking industry are not confined to the UK. There have been many headlines concerning Italian banks' bad debts which once again raises the spectre of contagion in Europe and from which (despite the vote to leave) we would not be immune.

Many issues have been raised since June 23; the banking industry has had a difficult decade and it seems as though there is more to come. Some interesting questions have been raised, such as whether the retail UK-centric approach might have shortcomings in terms of an income stream that is more geographically and operationally concentrated. Ultimately capital strength still counts for a great deal – and the ability to maintain dividends.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.


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