Why UK recovery could rescue the great British banking sector sell-off

Helia Ebrahimi
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ROLL up, roll up. Britain’s banks are up for sale. This month and next, the Lloyds privatisation will compete for attention with Barclays’s £5.8bn rights issue. Then there’s the initial public offering triplets: Williams & Glyn, Virgin Money and TSB – all set to hit the market with aplomb. And that’s before RBS has turned up at the privatisation big top.

But who’s buying? After a catastrophic five years in the banking sector, investors are still licking their wounds, and the power struggle between Co-op’s bondholders and its parent about the structure of its forthcoming bail-in could push investors either way.

Since the crisis, UK banks have seen their value crash by upwards of 50 per cent, while balance sheets have faced the biggest retrenchment in modern history. In the wake of the first bank run since 1866, taxpayers have been left with a £107bn bill, while shareholders have made paltry gains after previous massive losses. The scale of upheaval has seen a third trimmed from RBS’s £1.2 trillion balance sheet, while its investment bank has been cauterised by political fervour.

And yet many intrepid fund managers have begun to wonder whether UK banks could return to being the utility-style, high dividend payers they used to be. After all, many are a levered play on the UK economy. If recovery is on the horizon, coupled with interest rate hikes, retail banking will be the top act in the high top.

But these financial institutions still face daredevil challenges from regulators, and known and unknown redress costs. The day Lord Sugar made a complaint against Lloyds for mis-selling interest rate swaps was the day caveat emptor died – and banks realised just how vulnerable they were.

Then there is the issue of cyber security, which UK intelligence has described as the biggest threat to the economy. Lenders are turning somersaults to investigate how much of a nightmare this really is. Add to this not only balance sheet and capital misdemeanours, but a litany of scandals: from money laundering to price manipulation to mis-selling. Will banks ever be the same? Clearly they won’t – but they could still be a decent bet for investors.

Banks have always been notoriously inefficient and one thing the crisis has achieved is trimming much of the fat, with Lloyds ahead of the pack. And the return of the housing market has come at a propitious time.

The UK mortgage market is now 10 per cent bigger than at the time of Northern Rock’s collapse, and all guesses are that it will continue to grow. In the UK there are 27m homes, worth a total of £4 trillion. Over £1.5 trillion is owned outright. Just seeing that stock change hands – as new buyers take out loans to buy – would give a massive boost to the mortgage market. The Vodafone windfall is also good news, as investors look for new homes to put their capital to work.

UK banks are probably still a high wire act. But there is definitely money to be made in this circus. We have a week-long special report on UK banks; we kick off today with Lloyds Banking Group.

Helia Ebrahimi is UK business editor at CNBC. Follow her on Twitter @heliaebrahimi