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The Big Four British Banks: which one should you invest in?

We’re about to get the results of the Big Four UK banks Q3 earnings and each has different issues and challenges.   I talked about some of the outlook in this area on CNBC yesterday …

… and thought it worth sharing my summary notes.


When Antony Jenkins was made CEO of Barclays Bank, some cheered whilst a few groaned.  Three years later, the groaners are cheering and the cheerers groaning, as the bank returns to focus upon being an investment bank once more.  This is reflected with the imminent appointment of Jes Staley as CEO.

The Jenkins era began in July 2012 when Barclays was plunged into crisis by the governor of the Bank of England’s decision to force out Bob Diamond as chief executive amid uproar over the bank’s role in the Libor interest rate rigging scandal.

At a crisis meeting to decide who should replace Mr Diamond, most board members agreed with their headhunters that by far the best candidate was Mr Staley, then head of JPMorgan Chase’s investment bank. But PR adviser Sir Alan Parker warned of a terrible backlash from regulators, politicians and the media if Barclays hired another American investment banker — especially as it would have cost about $30m to buy out his contract.

Instead, the board opted for the safer choice of Mr Jenkins, who was running its British retail bank. “It has taken us three years to realise that this was a mistake,” says a person involved in choosing Mr Jenkins and Mr Staley. “But at the time, there was such hysteria around Barclays, we felt we had no choice.”

“It is sad; a lot of ground has been lost,” says a senior Barclays executive. “What is clear from the Antony Jenkins experience is that the risk of hiring someone who doesn’t understand investment banking is greater than someone who doesn’t understand retail banking, which you can pick up pretty quickly.”


Fuelled by the People’s Bank of China’s decision to weaken its currency in August 2015, nearly $30 billion has been wiped from HSBC’s market capitalisation. The shares have lost a quarter of their value in the past five months and sit near a four-year low but, with the commercial bank now looking cheap, maybe the bank has reached an all time low and investors should buy up the shares now.

Within HSBC there are a number of attractive businesses with high return potential in both the UK and Asia, which generated 70% of the group revenue last year.  After nearly a decade of de-leveraging, HSBC’s sustainable return on equity (RoE) has been significantly reduced and its regulatory backdrop continues to morph. Investors should be keeping an eye on risk weighted asset (RWA) inflation, which could offset some of the group’s total RWA reduction programme. News that Swiss officials are investigating HSBC for price fixing in the precious metals market is also unwelcome.

However, with a generous dividend underpinned by an impressive common equity tier 1 ratio – the bank is tipped to be above the top end of its target range of 12-13% by the end of 2016 – RWA reductions at its global banking and markets (GBM) division will help strengthen this indicator of financial strength further. The group revealed plans to cut its RWAs by around $290 billion in June, with $140 billion coming from its investment bank.

Although sales are expected to fall 2% to $59.8 billion this financial year, pre-tax profit should jump by around 20% to $22.2 billion, giving net earnings of $14.5 billion.

Lloyds Bank

Lloyds is gearing up for the big government sell-off, with shares priced at 5% below market value and one bonus share for every ten shares purchased, as long as you keep them for a year.  This is talked about as the biggest government privatisation sale since British Gas thirty years ago and, on the face of it, seems great. The issue is that the share price has been hugely disappointing this year, falling by 1% mainly because the bank has made a dismal net profit of 5% this year and a fall in earnings of 6% forecast next year.

This is as Lloyds competitors are delivering double digit earnings growth and, if that weren’t enough, there’s a whole raft of challenger banks out there who must be more appealing, as they can rapidly grow market share and are not viewed as part of the banking scene which contributed to the credit crunch.  In addition, Lloyds has a payout ratio of just 30% of profit as a dividend which, given its improving capital ratios and financial standing, seems low.

Despite these weaknesses, Lloyds is likely to deliver excellent capital gains in the long run. It has become extremely efficient in recent years and in a strong position to post above average earnings growth over the medium to long term.  While challenger banks do have appeal, Lloyds trades on a price to earnings (P/E) ratio of just 8.8, which is among the lowest ratings in the FTSE 100. Therefore, Lloyds looks like a superb buy at the present time.

Royal Bank of Scotland

RBS, or rather rbs, are now seen as a ‘compelling investment’ according to co-head of Goldman Sachs Investment Partners (GSIP), Raanan Agus. That’s good news as it comes at a time when the UK government is looking to trim its stake in the bailed-out lender, having shed 5.4% of its holding earlier this year.  Agus is saying that shares in RBS could almost double to 620p within three years. “From the largest bank in the world [editor’s note: and seeking to be truly global, RBS has now closed most of its overseas operations to become] a highly focused UK retail and commercial bank in a domestic market with attractive returns,” Agus told the Sohn Investment Conference.  The bank has been cutting costs and trimming non-core assets to focus on its core market in the UK and Ireland. The lender, however, has been struggling to return to profitability, with past misconduct continuing to weigh on the company’s performance.

Agus’ comments echo those of Morgan Stanley, which at the end of August forecast that the bailed-out lender would surpass profit expectations once it emerges from its extensive overhaul. Others, however, have been less upbeat on the stock, including Citigroup which last month flagged concerns over the time frame of the bank’s strategy to shift its focus back to retail and commercial banking in the UK.

Two other points of positive note: Visa and PPI.

Visa Europe

Europe’s banks are in line to share billions of euros from a buyout of Visa Europe by its U.S. sister company Visa Inc., which is expected to be sealed in the next two weeks.  Credit card company Visa is in talks to buy Visa Europe, and proceeds would then be shared by more than 3,000 banks and payment firms who own the network.

The deal is likely to be agreed and announced on Octorber 23 or shortly after, once the boards formally approve a deal, and worth around $21 billion.  Britain’s Barclays Bank could get a big slice of that pot – about $2 billion – as banks will be paid based on how much business they account for on the Visa Europe network. The data is not publicly available but Barclays is estimated to account for about 10% of Visa Europe’s business.

The End of PPI

Big UK bank shares rose at the beginning of the month with the news of an easing as the PPI scandal, which has severely blighted the sector in recent years, appeared to have an end in sight.  The FCA is launching a consultation to decide whether there should be a deadline, after which customers can no longer make a claim, and that is expected to be in the spring of 2018.

The PPI, or payment protection  insurance, debacle has been rumbling on for at least a decade.  It is estimated that around an eye-watering £20 billion has been paid out in claims for miss-selling to more than 10 million customers.  In June 2015 Lloyds, which has been the bank most exposed to PPI mis-selling, was given a record £117 million fine over mishandled claims, after it had already set aside £12 billion to deal with them. At its peak in 2012, Lloyds was getting up to 60,000 complaints a week.

One other negative note:


Britain’s biggest banks will have to hold up to £3.3 billion of extra capital between them, when they are forced to ringfence their high-street banking from their riskier investment banking activities in 2019.  The Bank of England recently detailed how banks will have to change to create ringfencing, which it hopes will stop so-called casino banking activities dragging down core personal and business banking, as almost happened during the financial crisis. 

The PRA also released plans to ensure “continuity of service” if part of a bank fails.  That includes making sure that areas such as IT keep on running even if one area of the bank has gone under.  This would add a further one-off cost of 5% and an annual cost of 3% to operating costs.

The watchdog estimated that could amount to £200 million once and £120 million annually for the average large bank.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Gavin

    Chris I must take issue with one comment on Barclays when you say that Bob Diamond had made a a mess of the bank. The reality is that Barclays navigated the crisis better than most thanks to bob Diamond but he ended up falling on his sword because of the Libor scandal (it later turned out that other banks had been as guilty if not more with regard to Libor but Barclays took the hit for coming out early).
    If Bob Diamond had survived Barclays would be in far better shape than it is today without a shadow of a doubt. Am I making Bob out as a saint…definitely not…but he is a leader and is able to get the best out of the people under his command. It is a pity that the UK Government effectively got to nominate Jenkins who was a weak leader…and you are correct on this count…hadn’t the foggiest idea of how to run an investment bank.