Is the market missing something or are banks just a terrible investment?
Russ Mould, AJ Bell’s head of investment has crunched the numbers ahead of the start of the bank annual reporting season that kicks off this Friday with NatWest.
According to Mould and consensus forecasts, Britain’s big five banks should announce record combined profits for 2023.
Add in buybacks and dividends and they will also have handed back 12% of their market value this year, but earnings ratings are half the FTSE100 average and the shares trade on big discounts to net asset value.
Britain’s banks currently are valued no higher than in spring 2009 just as the ‘world was staggering out of the Great Financial Crisis’.
More starkly, the All-Share banks' index currently languishes 70% below its all-time high of early 2007.
“Investors seem to think 2023 is as good as it gets, or at least fear another Financial Crisis is around the corner (and so the banks may be too cheap if they are wrong),” Mould suggests.
On that note, he says it will be interesting what the banks say, if anything, about the Financial Conduct Authority investigation into discretionary commission arrangements (DCA) in the car financing market.
Lloyds, in particular, is a major player in car financing.
Otherwise, Mould suggests investorslook for three things when the numbers are published.
“First, whether earnings will drop as sharply across the UK’s Big Five as they did America’s Big Four at the end of 2023 (where combined net income fell 41% year-on-year in the fourth quarter).
“Second, whether this sets a trend that will mean lower earnings in 2024.
“And finally, whether the loss of profit momentum means the big lenders deserve to be so cheap on an earnings, asset and yield basis.”
Mould concedes that, on paper, “the banks do look cheap,” after what "in aggregate" was a good year for the sector.
“There were no major scandals to force compensation payments.
“Net interest margins rose, at least in the early stages of the year, after a series of interest rate increases from central banks.
“The long-feared recession failed to arrive, so there was no major increase in bad loans provision. And the lenders continued to focus on costs.”
On the back of that, HSBC and Lloyds are tipped to post record pre-tax income, but share prices languish and Mould believes it is because the banks cannot be trusted.
“In sum, the bad memories of the Great Financial Crisis of 2007-09 continue to dominate investors’ perception of the stocks.“
Will that change after the latest series of results?
Until they shed theknack of finding the cloud in a blue sky, (PPI, Nigel Farage...etc), it is hard to see why, however good the numbers might be.
Shares in Lloyds were up 0.7% at 41.7p.
