When I sold my stake in Royal Bank of Scotland Group(LSE: RBS)18 months ago, it was the lastbig bank to exit my portfolio, having previously sold bothBarclays(LSE: BARC)andLloyds Banking Group(LSE: LLOY).It was the second best sector callI have made, bettered only by my decision to sweep the beleaguered supermarkets from my portfolio.
Banking stock performance hasnt been disastrous over the last twoyears, both Barclays and Lloyds are up around 5%, but any progress has been far too painful for me.
There Will Be Blood
The big banks are on the rack and there seems no end to the tortures they face, as regulators and unhappy investorsconstantly tighten the screws. Since the financial crisis, the big banks have been bled for around50bn in an endless scourge ofpenalties, lawsuits and fines, and there is plenty more to come.
Some tortures appear to be eternal, notably the hellish PPI mis-selling scandal, which first emerged in 1988 but rattles its chainsto this day. The Financial Conduct Authority may even unleash a fresh round of bloodletting next month, if it decides customers were due compensation because nobody told them how much of their PPI premiums went onthe advisers commission.
As I noted herelast week, the total bill could hit 33bn. Thats on top of the 26bn of provisions they have made so far.
Off With Their Heads
Even if the FCA does draw the line under PPI, the regulatory scourge wont go away. Barclays, RBS and others have both settled with US regulators over Libor-rigging claims, butthis hasmerely openedthe gates to a fresh lawsuit in London, with investors from around the world set to turnthe screw in a globalclass action. Each new scandal now seems to beget yet another.
The big banks have stuck their necks out all overthe world, and are now paying the price. RBS, for example, could be garrotted by the Federal Housing Finance Agencyfor selling mortgage-backed securities through its US subsidiary Citizens. It hasset aside $2.9. The US is court claim isfor $13bn.
Doing business in the notoriously litigious US is increasingly punishing, especially for foreign companies (just ask British Petroleum).
Paying For Pain
Theare plenty of agonies I havent yet mentioned. In the UK, the big banks face a string of mis-selling claims over interest rate swaps, card fraud insurance, packaged accounts and uncle Tom Cobleighs mobile phonecover. I would have a bit more confidence if I thought the banks were changing their ways, but the aggressive sales culture is hard to shift. Staff are still under pressure to hit targets, and cutting corners will always be tempting.
Mis-selling can still make money. Ironically,big bankshave still earned farmore from PPI than they have spent on compensation. But for me, there is simply too much pain to justify the diminishing gains from the sector. Masochists may disagree.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.