Over a decade after the financial crisis, investors are still reluctant to consider British banks. But their worries are overblown and the stocks are cheap, says Matthew Partridge.
British banks have been in the news for all the wrong reasons. We have seen queues outside Metro Bank, and it recently emerged that the Bank of England tried to prevent the prosecution of executives at Barclays for not disclosing the funding the bank received from Qatar during the financial crisis.
Stock returns have also been disappointing, with HSBC, Barclays, RBS, Lloyds and Standard Chartered all lagging the stockmarket over the last decade. However, look beyond the headlines and you will see that the major listed British banks have been grappling successfully with the legacy of the financial crisis, putting their houses in order in advance of any economic downturn, fending off competition from challenger banks, and getting down to the important task of growing revenues and profits.
Recovering from the financial crisis
Concerns that British banks haven’t properly dealt with the legacy of the financial meltdown of 2007-2008 are clearly having an impact on the sector. Even though the crisis was over a decade ago, “it has taken a long time for the public to forgive the banks for what took place in 2007-2008”, says David Miller of Quilter Cheviot Investment. Recurrent negative publicity over various cases of misconduct, notably the scandals over the fixing of Libor (a key interbank lending rate) and the mis-selling of payment protection insurance (PPI), have hardly helped.
Still, the good news, according to Miller, is that “there’s a big difference between how British banks are perceived by the public and how they are regarded by their peers – and compared with institutions in Europe and America, British banks have a good reputation”. For example, regulators have forced them to increase the capital set aside to cover losses on loans. The buffer between assets and loans is far higher than the rules stipulate.
The average Tier 1 capital ratio (a key gauge of financial strength measuring equity capital as a proportion of overall assets) has more than doubled since the crisis to 18% today; the regulatory minimum is 10.5%. This means that banks could still survive even if the value of their assets fell by nearly one-fifth. More generally, there’s been a “dramatic change” in the culture, which means that “they are now run in a much more prudent way”.
Less legal hassle
The huge amount of money that British banks have paid out in fines and settlements may not have been good for their bottom line, but at least it means that the remaining legal risk has “greatly diminished”, says Simon Gergel of Merchants Trust. Even though there is still a chance that there could be a surge of PPI claims in the run-up to the deadline (29 August), banks are “getting to the end of the process”. While legal risk “will never completely go away”, much tighter compliance means that “the potential losses from fines and lawsuits should be significantly lower than they were before”.
Of course, there are still “pockets of concern”, such “as loosening credit standards” in unsecured store-cards and zero-percent balance transfer cards, says Philip Matthews, co-portfolio manager of the TB Wise Multi-Asset Income Fund. However, balance-sheet quality “appears to have been demonstrably improved”.
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