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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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8 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Nov 21, 2012 at 12:15

Judging by the performance of his long/short funds, if he says buy, I’d be tempted to sell!

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Nov 21, 2012 at 12:45

I doubt CL has tried opening a bank account recently either. The HP/Autonomy (mis/creative) accounting scandal is just the tip of the......the banks & utilities are up to merde.

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david rogers

Nov 21, 2012 at 13:02

Following on from the comments of Anonymous 1 the dismal performance of the global investment trust doesnt add credibility to opinions from SVM

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Anonymous 1 needed this 'off the record'

Nov 21, 2012 at 13:17

quote from SVM website:

The Absolute Alpha Fund aims to beat cash returns over a 12 month period, substantially beat cash returns over 36 month periods and beat the equity market over a full cycle....

From the same website, Absolute Alphas return over three years -28.0%.

Epic fail?

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Dice McCairn

Nov 21, 2012 at 14:03

At the same time as having some of the most dismal performing funds SVM has some great funds. Look at their European SRI fund or Margaret Lawson's.

Their global fund is abismal...........

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Philip Milton

Nov 21, 2012 at 14:20

Hey, give the man some credit - he is an excellent and well-respected fund manager and after the fall-out on SVM Global, we're buyers - joining us? We weren't in the 'bad' funds however. He'll come good, mark my words.

I can see the banks as being the next Government privatisation programme - you saw it here first - and at a profit.

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david rogers

Nov 21, 2012 at 16:23

Mr Milton, not joining you as a buyer but hanging in there in the hope that you are right!

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Nov 21, 2012 at 17:11

I cannot see a privatisation of the banks until the regulators start coming down hard on derivatives and especially synthetics. If the issuers get the green light without there being a massive clean up in London derivatives beforehand then there will be an even bigger scandal than what we've gone through all in the name of investor protection.CMcL is calling it early on banks imo.

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