The Libor rate-rigging scandal, its ramifications and its subsequent fallout, including Barclays’ record £290m fine from the UK and US financial regulators, plus the resignation of chief executive Bob Diamond, have generated a huge amount of media coverage but how much does it actually affect the investment case for UK banks?
Clearly the latest revelations are further evidence of a pretty rotten culture that has existed within British banks and none of what follows is intended to condone or apologise for that. However, one of the fundamental points of value investing is to try and take emotion out of the investment process and that is what we shall aim to do here.
The day Barclays’ fine was announced, the bank’s market capitalisation fell some £3.5bn – more than 10 times as much as the fine. This was an emotional reaction by the market, which was essentially giving up on banks as almost uninvestable.
And yet, over the last three or four years, the banks have been making some steady progress. It may often have felt like two steps forward and one step back – and occasionally like one step forward and two steps back – but they have repaired capital, improved profitability, jumped through all manner of regulatory hoops and endured a great deal of political scrutiny – not least as a result of the report from the Independent Commission on Banking.
That political scrutiny, which now looks set only to grow even more intense, appears to have been the last straw for the market, which feels it cannot invest in banks because of the associated headline risk. But while headline risk can be deeply uncomfortable – for investors as much as for those making the headlines – it is unlikely to affect whether or not Barclays is a good investment.
All sectors and all businesses carry headline risk, all the time. In June, for example, News Corporation and BSkyB were attracting a lot of very negative headlines while two years back BP was in the news for all the wrong reasons and, a decade ago, the market was terrified about the threat of litigation hanging over the tobacco industry. These things are part and parcel of being in business and, as often as not, can present those taking a longer-term view with opportunities to invest rather than be wiped out.
Clearly banks are not helping themselves at the moment. They have become the focus of extremely close political attention, which is rarely a good thing. Undoubtedly political and regulatory factors will extract a cost but it is very unlikely they will ultimately determine whether banks are a good investment. As ever, that will come down to their fundamentals as businesses, their balance sheets and the valuations at which their shares are bought.
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