As a result of the financial crisis, the UK banking system is now highly dependent on the ordinary taxpayer. Not only does the state own a large proportion of two UK banks, Lloyds and Royal Bank of Scotland (RBS), but the Bank of England is keeping interest rates low until the economy recovers, so savers and pensioners are receiving pathetic returns on their money.
Given that we are all being so generous, is there any way that investors could extract some compensating profit from the sector? A look at the figures in banks’ recentlypublished annual reports suggests it’s unlikely just yet.
All banks have written off billions of pounds in bad loans already and more write-offs seem likely. RBS and Lloyds, for example, are still struggling with their exposure to Irish debt, mainly property-related.
Domestically, the mis-selling of payment protection insurance has bitten hard. Lloyds alone set aside £3.2 billion last year to meet compensation claims. And the rumbling eurozone crisis still has the capability to deliver nasty surprises.
Regulation will bring further challenges. All banks are being asked to hold more capital to cover the risks in their businesses, so there is less money for them to use to generate profit by lending or other means. True, the prices of some bank shares have risen by quite large percentages recently. But this recovery was from very low levels.
I suspect the most likely way for taxpayers to get some recompense for the massive support given to banks is when the government feels able to sell its holdings in the market and recovers our money. Don’t hold your breath.
Tom McIntosh may have an interest in any investment topic he writes about.