It’s result season at the banks, but what about their long term prospects? And are bank shares now a bargain?
How soon will banks recover? Are bank shares bargains?
There are businesses that have done well from Covid-19, but most have suffered, as I guess we all have, emotionally. UK banks are among those hit and hard, but this is not like 2008. So far, the signs suggest the banks will recover, but are these signs reliable? And are bank shares now so cheap that they are bargains?
Banks don’t like low-interest rates as they eat into their margins, but let’s face it, without low rates they would have been scuppered.
Think back to 2008, suppose central banks had not drastically cut interest rates. House prices would have fallen much further than they did and taken much longer to recover — if indeed they had ever recovered. Debt defaults would have risen, as a result. The cost of government banking bailouts would have been much greater. I suspect that bank shares would be much lower than they are today.
The Covid-19 crisis is more severe than the 2008 crash in most ways. But one difference is that we do not see a financial crash; there is no hint of a major banking crisis. Banks and shareholders can partly thank central banks for this — the cuts in interest rates have helped enormously. But so too have regulators. The capital requirement imposed on banks by the Basel banking accords mean that the UK’s top banks are in much better shape than in 2008.
Globally, debt levels increased enormously, but UK banks did not see their exposure rise in tandem.
Let’s take a look at bank shares.
The share prices
So far this year, shares in Lloyds Bank and RBS have slightly more than halved, and shares in HSBC and Barclays have fallen by a little less than a half.
But what about the longer term?
Even at the beginning of this year, shares in Barclays were down by a quarter from five years before. They were less than a sixth of the 2007 level.
At the beginning of this year Lloyds shares were down roughly 15 per cent over five years and were a tenth of the all-time high.
For RBS, shares had fallen by around a quarter over the five years to January. They were a fraction of the 2007 high.
Finally, HSBC was something of a star. In January, shares were actually up on the five years and only down by around a third (a little over) from 2007.
Do you see what I did there? “Only down by a third,” over 12 years or so. “Only down!”
Investors are entitled to ask, what’s the point. I was always under the impression that investing was meant to be about making money. I guess, for investors who like to make a loss, banks were a good idea!
I can see why investors thought, post-2008, that bank shares had fallen so much that they were at a bargain price. But right now, Lloyds shares are only a fraction up on the post-2008 low. RBS shares are at an all-time low, Barclays shares are up a miserly five per cent or so, from the post-2008 low and HSBC shares are at their lowest level since 1996.
So even if you had timed your buying perfectly, and bought shares in each of the four banks at the optimal moment after 2008, you would still be nursing a loss.
Is now the time?
Maybe, bank shares are so cheap now that they really are at bargain prices.
Of course, one of the big motivations of bank shares is the dividend yield. But these have been hit hard. Indeed, the Bank of England had advised financial institutions to pause dividends for the time being.
The latest results from HSBC showed a 35 per cent fall in profits and the bank announced that it is considering paying a modest dividend this year. So let’s run that past you again: profits down 35 per cent and it may pay a dividend. Yet, shares rose, in fact at one point yesterday they had increased by more than 10 per cent in just two or three days. That is how low expectations were.
HSBC said that loan defaults were not as bad as expected. Well, they can thank central banks for that.
I think the Covid crisis will be with us for quite a few months yet, maybe a year. And I don’t believe that the markets have fully priced in the negative economic impact.
But bank shares are so cheap, so very cheap; maybe they are hard to resist. Of course it seemed like that post-2008 too. Perhaps, right now, they really are at a bargain price.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.