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Making sense of the banks

We look under the bonnet of the big five banks listed on the London Stock Exchange - Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered - and highlight the key things to look at when weighing them up
November 4, 2016

Banks are among some of the hardest companies for investors to understand. I know of many professional investors who will not buy the shares of banks because they do not understand them. By that I mean that they do not fully understand their assets and their liabilities - what they own and what they owe.

Once upon a time, banks were relatively simple and boring businesses. They took money from savers (deposits) and lent them out to borrowers. By charging borrowers a higher rate of interest than they paid to savers banks were able to make a profit. At the same time, they were conservatively financed and were able to withstand difficult times.

The 2008 financial crisis exposed many banks for how complicated they had become. Even the banks themselves didn't really know how much they owned and how much they owed. Shareholders found out to their cost that the value of bank assets was often a lot less than they thought and their liabilities were often bigger. In many cases there was little or no money left over for them.

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