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Bank shares have been among the market's star performers in the past few months, and recent half-year results from the sector were upbeat. But many doubts remain - about capital adequacy, bad debts and lending levels.
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YES, says Simon Webster:
The most fundamental principle of any investment is buy low and sell high. Bank shares have been in the doldrums since the autumn of 2007, but the question for investors is: have they already hit their floor or is there more pain to come?
When banks get it right, they can make a lot of money very quickly; we only have to look at JP Morgan's recent results to see that. But as many now know to their cost, when banks get it wrong they can lose it just as fast. So while buying the right bank shares is undoubtedly attractive, are there any "right banks"? In this era of partial or total state ownership, all banks are not equal.
Only three months ago Barclays was trading at 250 as I write they are at 356; HSBC was 530 and now sit on 669; but the performance of Lloyds ; 88 to 92.5 and RBS 39 to 45, both pretty much unchanged, leaves these two looking worrisome on performance. This also raises the possibility of dilution through rights issues; so I would not be encouraging anyone to leap in there. On the other hand Barclays and HSBC have managed without government capital and in recent months have performed well. For me, these are the 'right banks' to buy now.
Here's why: love them or hate them, and I suspect right now most of us hate them, we need the banks. Someone has to process our transactions and provide credit. There won't be any major new banks coming along, and even when times are merely OK, banks make money - they have a monopoly. In three years' time we should have seen some recovery, so over three years I would be buying Barclays and HSBC now but perhaps waiting to see whether the others need to raise more money before rushing in elsewhere.
Simon Webster is managing director of Facts & Figures: Chartered Financial Planners
NO, says Dennis Hall:
"My investment style is more Warren Buffet than it is Gordon Gekko. I buy to hold, and I haven't got the time or inclination to trade or short sell. For that reason, I'm not keen on investing in bank shares. The time to buy was when they were on the canvas; today they're not. They've been helped back on their feet to continue fighting, but they're still a long way from winning this particular bout. The banking sector, and the economy, is still on the ropes.
Recent half-year results from the banks show that bad debt provision has increased considerably, yet there's little talk of the mounting credit card and other unsecured debt. Increasing unemployment - many observers predict that it will continue to rise well into 2010 - is likely to mean that bad debts continue rising month on month. And the fact that credit card debt in the UK was dished out as haphazardly as sub prime mortgages were in the US, means there could be much more bad news to come. UK credit card debt is a real problem and the International Monetary Fund believes that Britain's credit card debt could eclipse the rest of Europe's.
Bad debts mean that banks will find it harder to rebuild their balance sheets, so they'll be reluctant to lend, preferring to hoard capital instead. This creates a vicious circle that will be difficult to break out of, and will in the short term create even greater problems with personal and corporate debt. Alastair Darling's recent comments about bank lending seem to have had little impact.
I'm struggling to find a convincing story in the banking sector; and for all the talk of tighter regulation at the start of the financial crisis, there doesn't seem to be much noticeable change in bank culture. It looks too much like business as usual in the investment banking sector, and in retail banking, no business at all.
Dennis Hall is a chartered financial planner at Yellowtail Financial Planning.
Have banks really repaired their foundations, or merely papered over the cracks? Are the huge share price gains of the past few months at odds with rising bad debts? Can they really escape without further government intervention? Leave your comments below!
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