A full 15 years after the financial crisis, the UK banking sector – and much of its European counterpart – continues to look as “uninvestable” as ever. Outside passive investors, obliged to hold bank shares because they are in the indices, few will go anywhere near them.
This should scarcely come as a surprise after the latest reporting season, culminating late last week in a profits warning from NatWest and another eruption in the ongoing row over the “debanking” of the former Brexit Party leader, Nigel Farage.
All those years spent trying to rebuild reputation seem to have come to nothing. Britain’s leading banks remain as much a political football as ever, their fate determined as much by ministerial whim and the shifting sands of easily angered public opinion as any grounded view of prospects and worth.
Hard though it is to believe, the NatWest share price is actually lower today on a comparative basis than it was in February 2009, when the entire banking system was still teetering on the brink.
“Memories are long”, says Joseph Dickerson, a senior analyst at Jefferies. “Nobody lost any money by not being invested in bank shares, so there is still a natural tendency to avoid them altogether”.
On the evidence of last week’s events, they are plainly right to do so. With fast rising interest rates, this ought to be a period of plenty for banking profits, tempered only by the pain higher rates inflict on debtors and the consequent risk of default.
After years of near zero rates, when the so-called “net interest margin” – the difference between average lending and deposit rates – was compressed to virtually nothing, profits have come bouncing back, allowing banks to rebuild capital and liquidity to levels which theoretically allow the sector to ride out even the most dire of recessions without mishap.
Yet still nobody’s buying. There is a fundamental loss of trust and credibility, which because a healthy banking sector is vital to overall commercial well being only adds to the gathering sense of economic malaise in Britain and beyond.
The difference with the US is stark. I’m not sure there is a single US bank of any size whose shares trade below book value. Equally, it is hard to find any European bank whose shares trade above it.
JP Morgan Chase, for instance, trades at 1.7 times book value, but HSBC, widely considered one of the most solvent of European banks, trades at just 80pc of it, despite similar levels of return on equity.
The difference is of course partly accounted for by economic and geopolitical forces. The US economy continues to motor, as demonstrated by last week’s bumper third quarter growth figures, whereas Europe is once again flirting with recession.
China, where HSBC makes most of its profits, is also stalling. Growing geopolitical tension between the West and China meanwhile leaves HSBC acutely exposed to future sequestration.
Yet the differences are much wider than the specific characteristics of JP Morgan and HSBC. In the US, banks are broadly allowed to do their stuff as fully independent commercial entities. The political backlash that followed the financial crisis has faded.
In the UK and Europe, by contrast, memories are still raw; banks are still seen as beyond the pale and therefore to be kept on a very short leash.
Compared to their US equivalents, European banks are subscale, they are more heavily regulated, they have greater capital requirements, they have no capital markets union to fall back on to defray risk, and they are hugely unpopular, making it difficult to profit while the sun is shining for fear of political reprisals.
Both Spain and Italy are currently threatening windfall profit taxes, while in Britain, banks are already subject to a supplementary corporation tax rate and an ongoing banking levy. Rarely a day goes by when banks are not under attack for widening their net interest rate margin. Political punishment beatings are par for the course.
Despite being subjected to the harshest possible of stress tests to ensure adequate capital, European and UK banks were unnecessarily banned from paying dividends during the pandemic. This didn’t happen in the US to the same degree. Is it any wonder investors are on strike?
Never mind the banking crisis itself, the subsequent destruction of shareholder value during NatWest’s politically instructed march away from its international, investment banking, and global payments system pretensions to common-or-garden utility bank was off the scale.
Into this already overwhelming cocktail of negatives marches Farage, whose debanking has prompted Iain Duncan Smith, a former Tory party leader, to say that no Conservative should ever bank with NatWest again.
Duncan Smith’s anger is understandable in some regards, but he should be careful what he wishes for; sparking another run on the bank is presumably not what he had in mind, for it might only necessitate another government bailout.
It is hard to imagine anything quite like the Farage affair happening at JP Morgan Chase, whose combative and outspoken boss, Jamie Dimon, is the very antithesis of the cancel culture which seems to have permeated NatWest and its subsidiaries.
Nor would it ever have happened in the good old days of Captain Mainwaring style, customer facing, branch banking. The touchy-feely “inclusive” culture that Alison Rose, the now departed NatWest chief executive, sought to create at NatWest seemed wholly to forget that half the country voted for Brexit.
For them, Farage is more hero than villain. Political judgements are not for banks, or their staff, to make.
NatWest has done itself massive reputational damage by allowing itself to be played by Farage in this way. Serious mistakes were made. Rose no doubt fully deserved her defenestration.
Yet the manner of her departure, on the direct instructions of Andrew Griffith, the City minister, speaks to the same concerns over political interference as those that have made the entire European banking sector “uninvestable”.
Farage has done more to undermine today’s Tory party as a sensibly minded, centre right political movement than anyone else in Britain today. Yet the Conservative Party leadership remains completely beholden to their nemesis, so much so that they recently hosted him at their own annual conference in Manchester.
It was silly of the board to have defended Rose; she plainly had to go after her breach of client confidentiality rules, however innocent she thinks her remarks might have been.
But whatever the rights and wrongs of it all, the fact that the board had its hand forced by a Government more motivated by its desire to appease discontents on the Right than any financial consideration gives you all the reason you need as an investor to give banks like NatWest as wide a berth as possible.
What other commercial interests might be casually surrendered for supposed political gain? NatWest is still 40pc owned by the taxpayer, but, frankly, it might as well be wholly nationalised for all the difference it makes.
https://news.google.com/rss/articles/CBMiY2h0dHBzOi8vd3d3LnRlbGVncmFwaC5jby51ay9idXNpbmVzcy8yMDIzLzEwLzI4L2ZhcmFnZS1uYXR3ZXN0LXNjYW5kYWwtYmFua3MtcmVnYXJkZWQtdW5pbnZlc3RhYmxlL9IBAA?oc=5
2023-10-28 11:00:00Z
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