More Bad News for Banks and their Investors

If there are any private investors still invested in major UK listed banks, last week (w/e 30/1/2016) was yet another for disillusionment. In the Financial Times, Lex hit the nail on the head when he said “The one-offs keep on coming. If one did not know better, one might suspect them of being two-, three-, or more-offs”. He was referring to Royal Bank of Scotland (RBS), but other banks likewise posted bad news during the week. Let’s take them in turn:

RBS warned of yet another year of losses in a Trading Statement – its eighth in a row. There will be £4.2 billion of accelerated pension charge recognition, an additional provision of £1.5 billion in respect of US mortgaged backed securities litigation claims, an additional provision of £500 million in relation to Payment Protection Insurance mis-selling and a £498 million impairment charge in its private banking business (Coutts). Did you think all the bad news was digested, and provisions made a couple of years ago to clean the bank up ready for sale of the Government’s stake? Apparently not. The ability for the Government to exit at a profit on its holdings looks as far away as ever, particularly as there is a legal suit from investors about the rights issue in 2008 still going through the Courts. The share price has been falling now for many weeks and the above news did not improve it.

How is that other bank faring in which the Government hoped to dispose of its stake (Lloyds)? George Osborne indicated that he was postponing the sale of the Governments stake due to “turbulent financial markets”. In other words, nobody, not even private investors who were to be offered some shares, wished to purchase more shares in anything at present. Indeed the Lloyds Banking Group share price has also been falling since the autumn of last year and at 65p is below the Government’s break-even price of 74p. It looks like Gordon Brown and Alastair Darlings scheme to bail out the banks by partial nationalisation in the great banking crisis, and turn a profit at the same time, is proving misconceived after all.

HSBC did not avoid bad news either. They were hit by a large Digital Denial of Service (DDOS) cyber attack which meant many of their customers were unable to access their on-line banking service for a number of hours. The police have been called in, but the real question is why HSBC did not have systems and software in place to thwart such attacks (such products are available), or why they did not work?

Did Barclays escape the wave of negative publicity? Not quite because it was revealed that they are being sued for £1bn by Amanda Staveley. She helped to raise loans of £5.8 billion in the Middle East for the company in 2008 to avoid the similar threat of partial nationalisation to Barclays. When the details of the deal were later revealed Barclays was fined £50m for not disclosing it properly so presumably this suit might threaten to reveal more.

But to cheer up those embattled bank investors (at least those in Lloyds and the former HBOS), the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) announced they were going to take another look at the activities of the former management and directors or HBOS prior to its collapse into the arms of Lloyds. This comes after the publication of a report from the inquiry into what happened which severely criticised the lack of action against the people involved, and subsequent pressure from MPs in Parliament to reopen the matter. Will anything significant come of it at this late date? It looks extremely unlikely.

It is an investment truism that folks don’t invest in businesses and management they do not trust. UK listed banks still have a long way to go to regain the faith of investors. Only when they stop revealing more historic misdemeanours and losses, or exceptional items of all kinds, will they regain the loyalty of investors. And of course after fixing their creaking IT systems.

Roger Lawson

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One thought on “More Bad News for Banks and their Investors

  1. It seems to me that banks may now be inherently uninvestable, in that regulation may be making it impossible for profits to cover the cost of capital. On the other hand it’s also impossible for all banks to be wound up, so someone has to own them. The FTSE 100 index has been essentially flat for nearly 20 years now – not all down to the banks but they are a significant part of the reason.

    (I don’t think the DDOS is in the same category as the other things though, I doubt that any online service will stand up to a large-scale attack, and I also doubt that they have more than a minor impact on a company’s reputation.)

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