The going remains tough for the big UK-listed banks, as the aftermath of the financial crisis rumbles on for longer than anybody dreamed.
The PPI mis-selling scandalhas cost the big banks $26bn and rising (and willcontinue to hurtuntil spring 2018) while the tax and regulatoryonslaught frompoliticians and regulators has cost even more in ceaseless levies, taxes,fines, penalties and customer redress provisions. I suspect the biggest losses are unquantifiable: the multi-billion sumsthe big banks willlose (in perpetuity) from clippingtheir global andinvestment banking wings.
Competition Killer
They alsoface a growing threatfrom challenger banks and their regulatory backer, the Competition & Markets Authority. The CMAis halfway through an 18-month investigation into the current account and SME markets, dominated by the big four.Whilemost investors still want exposure to the key UK banking sector, in the current environment they should pick their stocks carefully.
Royal Bank of Scotland Group still has too many problems on its plate while HSBC Holdingsmust swallowa dollop ofcrisis-stricken China.
BARC And Bite
Barclays (LSE: BARC) is starting to make steady progress again, its share price up 13% in the last year. Executive chairman John McFarlane has warnedinvestors of a tough 18 months as he looks to hammer the bank back into shape, focusing on core operations such asUK personal and commercial banking, European and US investment banking, Barclaycard and Africa, and dropping those where marginsdont match up. Expect no flip-flopping from hard manMcFarlane, who recently banned the offending footwearfrom head office.
Focusing on core strengths isa sound strategy for a business that has come under fire from so many different angles. At a forecast 10.7 times earnings there is still value in Barclays, and while todays 2.5% yield still disappointsthe dividendis nicely covered 2.7 times and forecast to hit 3.6% by the end of next year. Forecast earnings per share growth of 36% this year and 19% in 2016 should keep the bandwagon rolling. If the hard work is done by 2017, as McFarlane reckons, investors willbe glad they bought today.
Laugh Out LLOY
Dont be distracted by next springs popular privatisation ofLloyds BankingGroup (LSE: LLOY), there are good reasons to buy this stock now. At 8.8 times earnings the price is right,even without the incentivesChancellor George Osborne is promising next year. It still yields less than 1% but dividend take-off is almost upon us and City forecasts suggest this could top 5%as early as next year.
An expected 6% drop in earnings per share next year shows that Lloyds is still in recovery mode. Like Barclays, itis rightly focusing on its key strengths, the UK personal and small business banking markets, although thiscouldbackfireif the UK recovery stalls and interest rate rises are postponed. The Lloyds share price is up just 3% this year, despite rising profits, hobbledby institutional and now retail sell-offs.
Once the spring flotation is done and dusted, Lloyds is free to start climbinghigher,especially if anover-subscribed privatisation whips up investor excitement.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
