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Colin McLean: why the banking sector is attractive again
by Colin McLean on Nov 21, 2012 at 11:51
While the impact of new regulations and scandals are impossible to quantify, Colin McLean explains why political ambition will make the bank sector more attractive in an exclusive article for Wealth Manager.
The SVM founder writes:
The troubled banking sector seems to defy conventional analysis at present. The impact of new regulations, combined with scandals and regulatory fines, seems impossible to calculate.
Bank ratings across Europe – and in the UK in particular – show that most investors have given up trying to value bank shares. Many conclude there are easier ways to make money than betting on how the banking crisis will pan out.
But the case can be made for buying banks. The key is to look at the psychology of those who control banks’ destinies – the politicians.
The negatives are easy to see. Market commentators and regulators alike are encouraging politicians to take a tougher stance on banks. It is not just a matter of punishing the sector for its behaviour up to 2008, but a determination to avoid any repetition of those mistakes. Many think that a sound bank sector in future – to prevent any more taxpayer losses – should involve much higher reserves.
Essential to financing
Banks are essential to lending and to financing credit markets but society has limited risk tolerance. Banks with leverage that reached 60 times in 2008 have now typically at least halved the ratio.
Leverage peaked in the crisis at levels that left a less than 2% margin of error for some banks, but prudent banking in future might involve leverage of no more than, say, 10 times. Regulators around Europe would be much more comfortable with that structure.
However, this seems unlikely to happen any time soon. Politicians might not feel like appeasing the public and deflecting criticism from their opposition by flogging the sector a bit more, yet hitting banks does not look like the way to get re-elected. Creating economic growth, with healthy bank lending, is what matters to the public.
Although a few European banks have recently raised equity – generally on distressed terms – such finance is not currently open to the partly nationalised UK banks, nor is their profitability likely to build up balance sheets in the near term. Different solutions are needed.
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