News Column

Big banks' investors might be the last to benefit from the recovery

August 1, 2014


Traditionally, banks are cyclical businesses - they make money in the good years, and they find it tough in bad times when un-employment rises and borrowers struggle to repay their loans.

As you would expect, British banks have come out with a decent set of financial results for the first half of this year as the recovery takes hold.

But investors should not get too complacent.

Look at Lloyds to see the risks that the whole industry faces.

Its underlying profits - those made in the business lines it wants to keep, not those it is shutting down - look great at 3.8bn for the first half 2014.

But it ended up with only statutory profits, those which it could pay out as a dividend - if it was yet allowed to pay a divi - of 863m.

Part of the difference is made up of those non-core units the bank is cutting back on quickly.

But big chunks are fines and other payouts to compensate for bad behaviour of the past. That is hitting all the big banks, again and again.

Every month, the UK'sFinancial Conduct Authority launches new investigations. And US regulators, whose fines tend to be bigger, are even more keen on walloping British banks.

Investors should not get carried away with the UK growth story underpinning the banks. For the chances are regulators will take a chunk of the profits well before shareholders do.

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Source: City A.M. (UK)

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