The newswires have it that the UK government is weighing up selling part of its holding in Royal Bank of Scotland (LSE: RBS) later this year, even if at a loss.
I think that would be a wise move. Selling will eliminate the risk from the investment and provide the opportunity for politicians to put our money back to work for the benefit of the country and its citizens.
Opportunity cost
Money invested in London-listed bank shares has been dead money for sometime. Look at the share-price charts of Royal bank of Scotland, Banco Santander (LSE: BNC) and HSBC Holdings (LSE: HSBA) anyone investing in these three banks five years ago will be disappointed. I think the future looks bleak for banking shares, too.
Why has the share-price performance of the banks let investors down? Surely, with the macro-economic picture sputtering back into life, bank shares should be flying! We might think so, but that could be a common misanalysis of the situation.
The banks find themselves up against two distinct forces working against any meaningful advancement as an investment for their shareholders. That makes them unattractive, even as a hold. Our money, and the governments, is better invested elsewhere.
Negative forces
Since the banking crisis, the banks are up against an escalating regulatory burden evolving with the aim of keeping them in check so that the world never faces a banking crisis of such magnitude again.
In Britain, theres some evidence that regulators rhetoric is gathering pace. The very dominance of the UKs five biggest banks is under threat. Its a similar story around the world as well. Regulators, with the backing of national populations, want to keep the banks in line and cut them down in size, too. Thats a powerful force working against a longer-term investment in the banks.
The other big problem for bank shares is that the fortunes of banking businesses tend to shadow general macro-economic cycles. Banks are among the most cyclical of businesses on the stock market, and we should never view them as buy-and-forget investments. Share prices in the sector rise and fall with profits, and cash flow, in line with the ups and downs of the macro-economic cycle.
In response, the stock market marks down the value of banks as we progress through the up-curve of the macro-cycle. What I believe we are seeing with the banks, right now, is gradual P/E compression as the cycle unfolds, in anticipation of the next occurrence of peak-earnings. Price-to-earnings measures will continue to fall and dividend yields to rise, even as the banks post rising profits. The valuation-compression effect we see with the cyclical banks is the second negative force working against total investor returns for shareholders.
What next?
Rumours persist that the finance ministry is warming to the idea of selling a partial stake in Royal Bank of Scotland at a loss. I think we should all pick up on that vibe; now really could be timely to ditch shares in Royal Bank of Scotland Group, Banco Santander and HSBC Holdings.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.