Prices in 2012 seemed driven by some bizarre inverse correlation
As much of the global financial system cranked itself back into action on Monday, there were auspicious tidings for bank investors.
Some of the world’s biggest lenders have enjoyed a healthy new year’s bounce in stock prices, courtesy of the Basel Committee on Banking Supervision and its pragmatic decision to soften incoming regulatory liquidity rules. Broadening the definition of “liquid” assets, and extending the deadline to meet them until 2019, helped lift share prices by 3 or 4 per cent.
Could this signal the direction of things for 2013? Might the year ahead be a boomtime for bank equities, as lenders put a year of scandal and stagnant economic growth behind them?
The first thing to say is that for all the disaster stories for banks in 2012, last year was far from disastrous for investors. Yes, there was plenty of knuckle-rapping from regulators and a surfeit of scandal generally – from mis-selling of UK payment protection insurance, to manipulation of the Libor borrowing rate, to money laundering and sanctions busting. But bank shares soared, as lenders showed some signs of profitability recovering despite the continuing crisis.
The FTSE World Banks index was up by a quarter last year, outperforming equities generally by 10 per cent – though longer-term investors will remember the more damaging 25 per cent decline in 2011, not to mention the 56 per cent collapse in 2008, only partly righted by 2009’s 38 per cent rebound. In several cases 2012 share price performances were seemingly driven by some bizarre inverse correlation with lenders’ misdeeds. Among the best performers were three of the big UK banks – Barclays, which was fined $450m over Libor and lost its chairman and chief executive; HSBC, which was fined $1.9bn over Mexican money laundering and Iranian sanctions breaches; and Lloyds, whose PPI mis-selling has cost it £5.3bn. Barclays and HSBC shares were both up about 50 per cent, while Lloyds’ investors doubled their money.
It wasn’t only UK banks outperforming eccentrically either. JPMorgan shrugged off the scandal of its chief investment office, in particular the trader who became known as the London whale for his outsized trades, and the near-$6bn losses they generated.
Switzerland’s UBS was meanwhile wrestling with a rogue trading scandal and ended the year with a $1.5bn Libor settlement. Both banks’ shares rose more than a quarter in 2012.
Of course, nobody knows exactly which scandals and other challenges will confront banks in 2013. But if the quirky pattern of last year is repeated, perhaps now is the time to buy into Royal Bank of Scotland and Deutsche Bank – two of the next banks expected to settle with regulators over their involvement in the Libor scandal. There should also be some more fundamental reasons to be bullish around banks – including RBS and Deutsche – as the benefits of restructuring and cost-saving programmes flow through to bottom lines. The UK’s part-nationalised lender is into the fifth year of a massive restructuring that could drag it back to sustainable profitability this year, while the German flag carrier has recently embarked on a big jobs purge to prepare it for a bleaker investment bank landscape.
There may be more dramatic benefits to be seen at the likes of Citigroup and Barclays, under new bosses who are keen to root out past inefficiencies, with UBS the other notable restructuring story.
It feels out of tune with the mood of the moment to sound any downbeat notes for banks, but here are a few all the same. A bear would say that those Basel regulators have been shocked into leniency by the worrying state of the world economy. The US fiscal situation still casts a big shadow. The eurozone is far from fixed. China continues to slow down. And there is a risk that rising bad debts in Brazil and overheating property prices in Asia could yet end in painful blow-ups. There is still political momentum, too, behind profit-threatening structural reforms in the form of the Dodd-Frank legislation in the US, the Vickers reforms in the UK and the Liikanen review in the EU.
On balance, though, banks’ prospects look brighter than they have for a while. As Credit Suisse analysts predicted on Monday, European banks – the hardest hit by the crisis – could soon be trading on a par with their tangible net asset values, a turnround indeed from the typical discounts of as much as 50 per cent seen over the past year or two.
With regulators in many jurisdictions now favouring pragmatism and a concern for economic growth over purist reforms, bank shareholders have another reason to smile. At least until the next crisis.
Patrick Jenkins is the Financial Times’ banking editor
Some of the world’s biggest lenders have enjoyed a healthy new year’s bounce in stock prices, courtesy of the Basel Committee on Banking Supervision and its pragmatic decision to soften incoming regulatory liquidity rules. Broadening the definition of “liquid” assets, and extending the deadline to meet them until 2019, helped lift share prices by 3 or 4 per cent.
Could this signal the direction of things for 2013? Might the year ahead be a boomtime for bank equities, as lenders put a year of scandal and stagnant economic growth behind them?
The first thing to say is that for all the disaster stories for banks in 2012, last year was far from disastrous for investors. Yes, there was plenty of knuckle-rapping from regulators and a surfeit of scandal generally – from mis-selling of UK payment protection insurance, to manipulation of the Libor borrowing rate, to money laundering and sanctions busting. But bank shares soared, as lenders showed some signs of profitability recovering despite the continuing crisis.
The FTSE World Banks index was up by a quarter last year, outperforming equities generally by 10 per cent – though longer-term investors will remember the more damaging 25 per cent decline in 2011, not to mention the 56 per cent collapse in 2008, only partly righted by 2009’s 38 per cent rebound. In several cases 2012 share price performances were seemingly driven by some bizarre inverse correlation with lenders’ misdeeds. Among the best performers were three of the big UK banks – Barclays, which was fined $450m over Libor and lost its chairman and chief executive; HSBC, which was fined $1.9bn over Mexican money laundering and Iranian sanctions breaches; and Lloyds, whose PPI mis-selling has cost it £5.3bn. Barclays and HSBC shares were both up about 50 per cent, while Lloyds’ investors doubled their money.
It wasn’t only UK banks outperforming eccentrically either. JPMorgan shrugged off the scandal of its chief investment office, in particular the trader who became known as the London whale for his outsized trades, and the near-$6bn losses they generated.
Switzerland’s UBS was meanwhile wrestling with a rogue trading scandal and ended the year with a $1.5bn Libor settlement. Both banks’ shares rose more than a quarter in 2012.
Of course, nobody knows exactly which scandals and other challenges will confront banks in 2013. But if the quirky pattern of last year is repeated, perhaps now is the time to buy into Royal Bank of Scotland and Deutsche Bank – two of the next banks expected to settle with regulators over their involvement in the Libor scandal. There should also be some more fundamental reasons to be bullish around banks – including RBS and Deutsche – as the benefits of restructuring and cost-saving programmes flow through to bottom lines. The UK’s part-nationalised lender is into the fifth year of a massive restructuring that could drag it back to sustainable profitability this year, while the German flag carrier has recently embarked on a big jobs purge to prepare it for a bleaker investment bank landscape.
There may be more dramatic benefits to be seen at the likes of Citigroup and Barclays, under new bosses who are keen to root out past inefficiencies, with UBS the other notable restructuring story.
It feels out of tune with the mood of the moment to sound any downbeat notes for banks, but here are a few all the same. A bear would say that those Basel regulators have been shocked into leniency by the worrying state of the world economy. The US fiscal situation still casts a big shadow. The eurozone is far from fixed. China continues to slow down. And there is a risk that rising bad debts in Brazil and overheating property prices in Asia could yet end in painful blow-ups. There is still political momentum, too, behind profit-threatening structural reforms in the form of the Dodd-Frank legislation in the US, the Vickers reforms in the UK and the Liikanen review in the EU.
On balance, though, banks’ prospects look brighter than they have for a while. As Credit Suisse analysts predicted on Monday, European banks – the hardest hit by the crisis – could soon be trading on a par with their tangible net asset values, a turnround indeed from the typical discounts of as much as 50 per cent seen over the past year or two.
With regulators in many jurisdictions now favouring pragmatism and a concern for economic growth over purist reforms, bank shareholders have another reason to smile. At least until the next crisis.
Patrick Jenkins is the Financial Times’ banking editor
No comments:
Post a Comment