Ten years ago, the economic crisis was gathering pace and shares in the financial sector were in freefall. Since then, the fortunes of individual UK banks have been very mixed. These once-popular shares became pariahs that had no choice but to restructure and recapitalise. Plus they had to deal with various scandals and the challenge of low interest rates - and they still do.
So it’s no surprise that financial stocks - especially banks - have been marked down by the market over the past decade. Until now, only hardened value investors have shown much interest, but that has started to change. A trend we’re seeing right now in a number of shares across the financial sector is that they fit the investment profile of Turnarounds. It suggests that after a long period in the wilderness, some of these beaten up stocks are picking up momentum.
Banking on a recovery
One of the lessons of the credit crisis was just how difficult it is to understand banks and the assets they’re exposed to. Take Royal Bank of Scotland, which was a poster child for the crisis. Back in February 2007 it reported a record operating profit of £10.3bn and surprised the City with a 10% dividend hike. Even the write-downs RBS was making against bad debts in the US mortgage market didn’t seem like a major problem. Yet eight months later the bank essentially failed and was forced to take a government bail-out.
But RBS wasn’t the only bank with problems - the stories across the sector are well known, and some still rumble on. For instance, Barclays managed to recapitalise itself with the help of sovereign funds in Qatar. But the details of those deals have come back to haunt it, and its former executives are now facing fraud conspiracy charges!
But while the credit crisis caused problems for many banks, one of the biggest pressures for the sector since has been low interest rates. A longer-for-lower policy by the Bank of England to stimulate consumer spending has been tough on banks’ net interest margins. While rates have started to rise in the States, the UK is yet to follow suit.
But not all investors have been put off by these problems. Last September, Nick Kirrage who runs Schroders’ deep value-focused recovery fund,…
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