The latest reason not to buy into the banking sector
Neil Woodford has come up with another very good reason why you shouldn't own bank stocks, says Merryn Somerset Webb.
A couple of years ago, I noted that not everything reverts to its mean. I pointed particularly to the price of shares in the UK banking sector. Go back to 2012 and look at them in terms of ther historical price/earnings (p/e) ratios or their price to book ratios and they looked more than cheap they looked practically free.
But I still couldn't bring myself to buy them. As I said at the time, the banking business model of the past couple of decades (taking advantage of leverage, abnormally low interest rates, and light-touch regulation to make managers rich and shareholders poor) is not a model that will be allowed in the next decade.
I expected significantly tougher regulation to come in at some point, alongside "intense public scrutiny" as well as a range of new entrants to markets that had long been monopolised by our big big banks think peer-to-peer (P2P).
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I also thought that in the longer term, we would see changes to managerial incentives that would drive lower short-term returns in future, and see valuations stick far below their old mean.
I'm still waiting for a lot of this, but the intense public and regulator scrutiny is definitely with us, something that Neil Woodford (now mainly known as 'superstar fund manager Neil Woodford') appears to have noticed too.
He is known for his long-term value approach to investing, but has just sold out of a stake in HSBC bought only a few months ago. Why?"Fine inflation."
As the demand from the public to see the banks suffer in one way or another has grown, so has the absolute level of the fines that the regulatory authorities have been imposing for "past and ongoing wrongdoings".
You can read superstar fund manager Neil Woodford's views on the matter, but "in the light of this growing risk" (note the Bank of America has just agreed to pay the "largest single federal settlement in the history of corporate America"), he now considers HSBC shares to be "broadly fair value", and therefore not worthy of inclusion in his portfolio.
It makes sense to us we will be adding 'fine inflation' next to 'increased scrutiny' and 'regulation' in our very long list of reasons not to fall for the idea that low-looking valuations justify buying shares in banks.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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