At last, UK bank shares rise like the phoenix from the ashes!
28 October 2024, 09:59
UK bank shares, after having spent the best part of fifteen years in the ‘doldrums’, have risen like the ‘Phoenix from the Ashes’ this year.
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The horrendous aftermath of the 2008/9 banking crisis has just about passed into the mists of time. However, the damage inflicted on society, the economy and the general wellbeing of the country was inexorable. Who could forget the elongated queues of depositors outside the branches of Northern Rock in September 2008, desperate to take their hard-earned cash out, before it was too late?
How terrifying it was to hear Chancellor Alastair Darling being told by the chairman of RBS, Sir Tom McKillop - ‘We’re going to run out of money this afternoon.’ Nor should anyone forget that thousands lost their jobs as a direct result of the worst global banking and credit crisis since 1929. It is generally accepted that 1.1 million people in the UK were taken out of gainful employment.
Well-informed rumour gave credence to the idea that Gordon Brown was forced to twist Lloyds Bank Chairman Sir Victor Blank’s and CEO Eric Daniels’s arms to buy HBOS for circa £12.2 billion in October 2008, to alleviate the pressure on the declining value of UK banks, triggered by the domestic banking crisis, which had been exacerbated by RBS buying in the very suspect assets of the investment banking business of ABN AMRO for €27.2 billion. Contrary to public opinion, unlike the US, the crash was not down solely to the effects of sub-prime lending; it was largely down to poor credit analysis, injudicious lending, and light regulation.
The Labour Government was forced to bail out the banks during this period. It made interventions to support the banking sector, by injecting £137 billion of public money in loans and capital to stabilise the financial system, most of which has been recouped over the years. The Office for Budget Responsibility (OBR) estimates that these interventions cost the public £23 billion all in all, by the end of January 2018. The net balance was the result of a £27 billion loss on the RBS rescue, which had acquired NatWest Group in 2000 for £21 billion. A little credit for the recovery was down to Gordon Brown.
However, it was the calm crisis leadership of the Chancellor, the late Lord Alastair Darling, the late Lord Paul Myners and Baroness Shriti Vadera that was instrumental in stripping out any signs of panic during these tense and dark days. Their reputations were greatly enhanced. In his capacity as head of UKFI, Sir John Kingman, who was responsible for £70bn of public money, also played a significant role. Bank of England Governor Lord Mervyn King and his deputy Sir Paul Tucker were superb in orchestrating sufficient liquidity into the system to keep the banking sector afloat with maximum efficiency and minimum fuss.
It cost the US Government $498 billion to bail out the US banking system in 2008. Hank Paulson the US Treasury Secretary, his successor Tim Geitner and Ben Bernanke, the Fed chairman used the Troubled Asset Relief Programme (TARP) that purchased assets and equity from financial institutions, totalling $700 billion, to help stabilise the banking system. This proved very successful, and the US recovery process for its banks was much faster than Europe’s banks. By 2009, 140 banks had failed. Bear Stearns, Lehman Brothers and Royal Bank of Scotland carried the most publicity in terms of notoriety.
UK banks were understandably forced to increase their capital ten-fold to conduct the same level of business. This legislation stunted growth and profitability for many years. Many were also precluded from conducting investment banking trading in the UK. These initiatives prevented any reasonable prospects for expansion. Barclays’s Bob Diamond pulled off quite a coup in acquiring Lehman Brothers' US investment banking and capital markets business in September 2008, two days after Lehman filed for bankruptcy. Barclays paid $1.75 billion for a "stripped clean" portion of Lehman, including most of its North American operations.
It took years for banking shares to recover and for the likes of Lloyds Banking Group and RBS/NatWest Group to cut back the taxpayers’ shareholding. Lloyds completed theirs under the watchful guidance of Morgan Stanley. Morgan Stanley was also holding NatWest’s hand through the same process. NatWest has only 15.90% of its shares in taxpayer’s ownership, down from 84%. However, the breakeven price for NatWest’s shares is 508p. Today’s price is 366p. It should not be forgotten that RBS’s share price touched 11p briefly in February 2009. It is understood that despite a considerable recovery, there will be no sale of the balance to retail investors in the foreseeable future. US banks recovered much more quickly, due to the intervention of TARP.
Inflation, having hit 11.1% in October 2022, the highest level for 40 years, certainly provided the platform for interest rates to rise to appropriate levels commercially, with Bank Rate hitting 5.25% in August 2023. The banking sector started to make decent margins for their lending operations. Provisions for bad debt also receded significantly. Rates have started to come down. Many feel that inflation could be stubborn and is likely to settle around 3.5%, though Goldman Sachs recently made a case for it to fall to 2.75% by 2026.
Since the beginning of the year, the UK banking sector has made the greatest gains in the FTSE 100 - NATWEST +66.63%, HSBC +8.64%, BARCLAYS +60.23%, LLOYDS +26.90, NatWest Group%, STANDARD CHARTERED +30.65%, METRO BANK +75.00%.
Last week was the start of the bank earnings season. Lloyds Banking Group was out of the traps first last Wednesday with a reported statutory profit after tax of £1.3 billion and a tangible return on equity of 15.2%. Barclays followed with £1.6 billion pre-tax profits, up 23% with a 12.3% return on tangible equity. On Friday, NatWest Group posted an attributable profit of £1,172 million and a return on tangible equity of 18.3%. HSBC’s share price has languished in comparison to its peers. Issues on the Chinese economy, especially property lending and pressure from Ping An Asset Management, which owns 7.98%, to divide the bank up, reports tomorrow further news on how this bank is to be split into four key units, and geographically into East and West. This innovation will take place next year. Standard Chartered Bank has recovered strongly and reports this coming Wednesday. Metro Bank’s renaissance continues due to securing a £925 million capital injection, which included a £325 million capital raise and £600 million in debt refinancing, agreed in October 2023.
The banking sector believes the outlook for the economy and its customers feels positive, but their customers, both company and retail, are looking for positive signs of growth opportunities from Wednesday’s Budget. The mood needs to improve significantly.
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