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Income Investor: should you buy UK bank shares?
Despite PPI mis-selling, Libor manipulation and money-laundering fines, our banks still have plenty to offer, says Income Investor.
For investors, the UK banking sector is widely seen as a bombed-out disaster area: one to avoid.
It seems that every day brings more scandal and failure relating to the UK's big retail banks. Barclays (BARC.L), Lloyds (LLOY.L), HSBC (HSBA.L) and Standard Chartered (STAN.L) have all hit the headlines for the wrong reasons. PPI mis-selling, Libor fines, money-laundering fines, operating losses – the list of bad news seems to never end.
What to do with bank shares?
Many income investors – like me – are probably sitting on holdings of shares in banks that used to be great dividend plays but were decimated when the UK government had to step in and save the banking sector from failure.
As part of the deal, dividends were stopped, and some fixed-interest securities were modified. Many will have lost money on the fall from grace of RBS (RBS.L).
But among the carnage there are some opportunities.
As I pointed out in a previous article, preference shares and corporate bonds issued by UK banks have provided high yields and substantial capital appreciation for the brave (or reckless?) investor who was prepared to buy them following the banking crash. Even today, yields on bank securities are still some of the best on offer.
And the value of bank shares has been shooting up this year: for example, Lloyds has doubled in value, even though it is not yet paying any dividend. Barclays is up (although by not as much) and is paying dividends again with a forecast yield of 2.7%. Even RBS has picked itself up off the floor.
Where the markets are heading
The fear of a total collapse of the international banking system is now receding. The continuing euro crisis continues to play out, but a solution seems to be emerging from the political mist. So we have two main price trends:
- Fixed-income bank securities have increased in price (reducing their yield), primarily owing to the huge amounts of government money being pumped into gilts, dragging down the rest of the fixed-income market.
- Bank shares have been rising strongly, despite continued bad news.
Now, I’m not a ‘value investor', but even I can see which way the market is moving.
So what to do now?
- If you are an income seeker and not already invested in the banks, you may want to buy some high-yield fixed-income securities. But be aware that, although you will retain your purchase yield, you will see a capital loss unless you buy below par and are prepared to hold it to redemption or ‘call’.
- If you are a ‘buy-and-hold’ income investor and are still holding bank shares, keep holding.
- If you have a ‘value’ part to your portfolio, consider buying bank shares.
- If you hold fixed-income securities from banks, you may have the chance to lock in capital gains by selling in the not-too-distant future, as it looks like QE may be coming to an end.
Finally, there is perhaps one potential further opportunity. My guess is that if unrest grows in Greece, the ‘least-worst’ solution may be for Greece to temporarily leave the euro for it to recalibrate its economy.
If this happens, there is likely to be a buying opportunity for bank shares and securities. So make sure you have some cash available.
If you've enjoyed this article, why not visit DIY Income Investor's blog? The views in this article are the author's own, and do not constitute advice.
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Look up the shares
- Barclays PLC (BARC.L)
- Lloyds Banking Group PLC (LLOY.L)
- HSBC Holdings PLC (HSBA.L)
- Standard Chartered PLC (STAN.L)
- Royal Bank of Scotland Group PLC (RBS.L)
More from us
- Income Investor: what are preference shares?
- Smart Investor: why I'm a value investor
- Lloyds and Barclays top complaints list after PPI failures
- Q&A: what is Libor and what did the banks do to it?
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by Gavin Lumsden on Oct 21, 2016 at 17:18