Bringing banks to account

The furore that surrounded the granting of a bonus to RBS chief executive Stephen Hester broke just after I had submitted my thoughts on the investment world for last week.

As it happens, I had been planning to say something about our banks. They are usually among the first to publish their results for the previous year and, being the global businesses they are, like to conform to the accepted standard of a calendar year end.

But this particular storm paled into insignificance when it was announced that Sir Fred Goodwin was to be stripped of his knighthood. By now, all that might have been aired on this topic probably has been. If ever anything looked like a shot across the bows of the banking industry, this was it. It won’t just be the profits the banks are making that will come under close scrutiny when their results are published but also the remuneration packages of their senior people.

Once upon a time, banks were the biggest sector in the FTSE 100 index and affected performance accordingly. There are, after all, no small banks lurking in the 250 or the small cap indices. Even after the hammering their share prices have taken through the odd financial crisis or two, they remain huge businesses in terms of market capitalisation, assets and employees.

Yet it is hard to see them recovering much favour from here, despite a general tidying up of their balance sheets. Aside from anything else, they are vulnerable to political interference, most probably in the form of punitive taxation on their profits or their bankers’ pay – probably both. Already, a European Union financial tax looks to be introduced sooner rather than later.

Financial services are important for the economy of this country. It accounts for far more of our revenue than any other major country – including America. What is bad for banks is probably bad for the rest of us, although, interestingly, new industries have swiftly moved in to dominate our domestic share market, with resource stocks the new kings of the castle.

Banks were the stalwarts of equity income fund portfolios, which is one of the reasons these funds suffered so badly in the wake of the credit crunch. But even these cornerstone funds are beginning to enjoy a resurgence. The speed at which the market has rebalanced is remarkable and should be taken as the positive sign it is. In the longer term, it could prove healthier for the UK economy to have less of a bias to the banking sector.

In the meantime, we will be learning how these bastions of our high street have been coping with a tricky lending environment and unfriendly stakeholders. Perhaps as important, we will be discovering how big the bonus pool is.

Even now, I suspect some creative thinking is going into the way in which the results for the year just ended will be presented. That is the problem with the money game. Too often, how profits are disclosed is more a matter of opinion than fact.

But one interesting snippet of information concerning the banking world did emerge last week.

Apparently in a survey that examined the strength of banking brands around the world, Europe had the biggest number of fallers in the
table, while Brazil, Russia, India and China – the Bric countries – were seeing their financial institutions clambering up the charts.

Yet another sign that the old world order is being overturned.

Brian Tora is an associate with investment managers JM Finn & Co