Should banks charge more for loans in the interests of shareholders and the wider economy?

10th December 2012

 

Should banks be charging more for their loans? We know what answer the general public, mortgage borrowers and indeed small business owners would give.

But is there a danger of forgetting two key interest groups – existing and future bank shareholders?

Perhaps they are starting to make their views known.

The Association of British Insurers, which represents most British insurance companies and their fund management subsidiaries, is arguing that banks are likely to remain ‘uninvestable’ unless they can increase what they charge the public and businesses for loans as Ft.com (behind paywall) reports.

It also argues that new banking regulations need to be speeded up to give the sector certainty, in a new 38-page report “the investibility of banks”.

The report is available for downloading from the ABI website, though we must admit it is quite heavy going. However, if you considering investing in banks again, it could be worth a read.

The report makes a clear link between profitable banks and the wider economy.

“A profitable banking system can self-fund growth, increase resilience through internally generating loss-absorbing capacity and pay dividends to shareholders. A healthy banking system, with sustainable profitability, is beneficial to the broader economy,” it says.

It is also querying the differences in the planned regimes between the UK and Europe arguing that, for example, there are potentially two versions of the ring fence between retail banking and investment banking operations.

There are also huge variations on capital requirements, for example, in terms what capital must back what mortgage lending activity across Europe. The report also has concerns about the realistic prospects and demand for ‘bail-in’ bonds, where some classes of bonds might be required to be translated into equity in the event of a crisis.

The ABI argues that all this and more is adding to confusion and making it much more difficult for investors to understand what sort of return on equity they may get if they invest.  

But as if to show how varying the challenges are, the ABI also wants to see a time bar on compensation claims for payment protection insurance, reported here on trade website FTadviser.com, echoing a similar call from the Confederation of British Industry, as Mindful Money reported last month.

The report also warns of other compensation concerns surrounding interest only mortgages and bundled bank accounts.  

Banks from an investor’s point of view

For a very long time, banks made up a significant proportion of stocks in UK portfolios and funds, with many posting big increases in shares prices up to 2007. Crucially the banks also represented a reliable source of dividends – making up around 20 per cent of all dividend payments according to the ABI, once again until the onset of the crisis.

For investors, the appropriate phrase may be “those were the days” though of course it was those stocks regarded as stock market darlings that punished investors the most.  RBS was once worth around £6.00 a share and Northern Rock more than £12.00.

Post nationalisation, Rock shares were worth nothing, effectively turning to dust in their investors’ hands, while RBS shares today stand at just below £3.00. Even that is misleading because the bank has subsequently swapped ten shares for one. The real price for comparison with the pre-crisis £6.00 is therefore just under 30 pence, a huge loss.

To sum up, almost every bank suffered and investors in banks have too. They were a diverse group ranging from ordinary bank counter staff, many of whom had build up large savings in employee share plans through to board members. The top execs’ share portfolios suffered too, but they usually received other compensations, such as keeping their hugely generous pension plans.

Ordinary share investors ranged widely in experience from the near professional through to many thousands still holding shares from the time their building societies demutualised in the 1990s.

But the bulk of shareholders were represented by a huge number of fund managers, insurers and pension funds. Many followed benchmarks and tracked indices that meant they had to include the banks and, therefore, for a long time had to follow them down. Bluntly millions of people have less money in their funds and pensions as a result. Many funds will still hold banks in their portfolios, because for instance they remain in the FTSE 100, but active fund managers and indeed asset allocators that still have a choice are often still very wary. It arguably makes a great deal of sense to question what can be done to change that attitude.

Mindful Money's view

Investors of all sizes and wealth will have learned some lessons from the crisis, but they are surely entitled to ask what normal will look like for banks in a few years’ time. Will banks ever find a place at the heart of portfolios again? 

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