After a difficult first quarter for UK-based banks, is the outlook finally beginning to brighten?
Laith Khalaf, senior analyst at Hargreaves Lansdown, says Yes.
There is no doubt things are tough in the banking industry. But while performance in the first quarter was poor, it was generally ahead of expectations, which serves to underline the level of pessimism surrounding the sector. Progress has been slow since the financial crisis, and there is still a long way to go when it comes to restructuring and de-risking. Litigation remains a key risk, particularly at RBS which is facing up to mis-selling mortgage-backed securities in the US. However, PPI costs appear to be disappearing out of the equation for the UK banks and, at around £40bn in total, that’s not an insignificant boost to profitability. Solvency ratios among the banks are also stronger than they were, which means that they don’t need to use as much cash building up buffers. The outlook is still challenging, but the sector is so unloved that it’s become attractive for contrarian investors.
Helal Miah, investment research analyst at The Share Centre, says No.
All the UK listed banks are in a better position today than they were a few years back. But that doesn’t mean the sector is out of the woods just yet. Banks continue to face regulatory headwinds, while PPI claims in the short to medium term could rise when the deadline for claims is established. There are still fines to be paid out for misdeeds by the banks in the run up to the financial crisis, while it’s possible that some of these misdeeds are yet to be uncovered (think Libor and gold price fixing). Most of the UK banks still have major investment banking operations which are facing tougher conditions as the global economy moderates. Restructuring at some banks has been too slow, which means that capital returns to investors will be further delayed. Interest rates will be lower for longer to hurt interest income, and finally, it’s a time of increased competition in the retail market as challenger banks pop up to steal customers.