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Outlook for the banks in 2016

Fundamentals once again look set to be the driving force behind the banking sector in 2016.

London
Source: Bloomberg

Over the last decade, whenever banks have been making headlines they have invariably achieved this for all the wrong reasons. The list of indiscretions from both the investment and retail arms of banks is extensive, and the billions returned to clients or regulators for historical indiscretions is still not finished.

The last six months however has seen an absence of their names from the front pages, but unfortunately that has not improved their standing with the investment community. After the first two weeks of trading in 2016 saw Barclays, Royal Bank of Scotland and Lloyds filling three of the top ten spots for equities closest to their 52-week lows in the FTSE 350. 

 

Company

12 month div yield

Barclays

3.43

HSBC Holdings

6.74

Lloyds Banking Group

2.33

RBS Group

none

Standard Chartered

9.17

Virgin Money Holdings UK

0.48

 

The hunt for good income stream is important but the banking sector has also seen a shift in regulatory relations and a focus on improving competitiveness for retail clients. Of course, it is worth remembering that the poorer the performance of the equity, the more impressive the dividend yield will appear.

Investors will always look for a good, well-balanced return; the old adage of ‘too good to be true’ dictates that a yield that looks unsustainable is probably just that ‘unsustainable’. With greater exposure to Asia, the recent turmoil has knocked the share price of both HSBC and Standard Chartered more than their counterparts.

Standard Chartered might have a dividend yield of 9.17%, but in the same time saw its shares fall by 42.66%. HSBC investors enjoyed 6.74% yield but suffered an 18.29% fall in shares over the same time.

 

Company

12 month share price performance%

Barclays

-16.52

HSBC Holdings 

-18.29

Lloyds Banking Group 

-12.19

Royal Bank of Scotland Group 

-28.45

Standard Chartered 

-42.66

Virgin Money Holdings UK 

-1.80

 

This year already has several banking sector moving events penciled in to happen. The governor of the Bank of England has made no secret of his desire to sell off the taxpayers remaining 9% stake in Lloyds. With the shares now trading back below the government’s breakeven level of 73.6p it makes completing this a tricky political proposition.

In the on-going hunt for equity investments the focus is on attractive income yields investing in Lloyds Bank, which will soon be released from the shackles of tight government scrutiny and therefore have an ability to increase its dividend yield as it sees fit, which will only add to its appeal.

Virgin Money has been the latest to get a London quote but look set to be joined by Clydesdale Bank which was previously acquired by National Australia Bank. The IPO could be as soon as February with an anticipated market valuation for the company between £1.5 billion-£2 billion. The exact level of the placing will be decided closer to the time but is expected to be in a range of 175p and 235p.

Where Clydesdale sits in the hierarchy of the banking sector could well be decided by what level of dividend yield it is able to achieve.

 

Bank

Market share

RBS Group 

4.60

Barclays 

16.87

Lloyds Banking Group 

21.54

HSBC 

49.03

Total market share

92.04

 

Regulators have been busy keeping an eye on the sector, which has triggered a widespread rethink by those in the banking sector as to how their business models should be structured. The government too, has also voiced its desire to see an expanded playing field with increased options for retail banking clients.

As far as market capitalisation is concerned, Asian-focused HSBC has almost half the market and a total of 92.4% is controlled by the big four. Although companies like Virgin Money and Clydesdale are unlikely to gain too much market share in the short-term, they are entering a market place where regulators will be more inclined to look favourably on them regardless of their small size as they seek to improve competitiveness.

Last year we saw the announcement that the Barclays chairman and board had decided a change of direction was required, and stated that Anthony Jenkins would depart the firm and Jes Staley would take over the helm. Considering the similarities between Mr Staley and previous head, Bob Diamond, this does appear to be quite a reversal of direction.

In the aftermath of the banking sector and stock market collapse, public pressure ensured banks took decisive action and investment banking arms took the brunt of this pain. What middle England and the City perceived to be appropriate action of course was never the same, as those inside the M25 were more likely to consider a less risk averse strategy in order to claw back losses.

The balance between an attractive dividend yield and a performing share price will be the key focus for investors. Throw into the mix the potential for Lloyds to increase its dividend payments once unshackled by government oversight, and the entrance of Clydesdale Bank, and this is a sector that should provide investors with ample trading opportunities throughout the year.

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