The £50 billion bailout of UK banks looks, at first sight, like a bitter pill
to swallow for private investors.
In return for offering much-needed capital to hard-pressed banks and building
societies, the Government will take a stake in those groups that apply for
this extra cash.
The result, says Nic Clarke, of Charles Stanley, the stockbroker, is that
existing shareholders will find their earnings diluted by the need for banks
to pay dividends on the new preference shares, or permanent interest-bearing
shares, that the Government will be taking.
One uncertainty is that no one yet knows how much interest the Government is
planning to charge for its capital injection and the rate could vary from
one bank to another as each individual deal is thrashed out.
A further concern for shareholders is that the Government has made it clear
that it intends to drive a hard bargain on the terms of each deal. Apart
from putting curbs on executive pay (which may be welcomed by small
shareholders), the Government has signalled its intention to monitor the
level of dividend payouts (which would be rather less welcome).
This could have big implications, both for individals depending on dividends
to augment their income and for equity income funds, which might be forced
to sell the shares of some banks if their dividend payouts fell so far that
they could no longer be classified as income stocks.
The Government's stake will also give it a voice in the future decision-making
of the banks. Justin Urquhart Stewart, of Seven Investment Management, the
wealth manager, says: “Normally, it is holders of the ordinary shares that
call the shots, not preference shareholders. But the Government is not a
typical preference shareholder and it will have a definite influence on the
policies of the banks in which it holds a stake. This may not be outright
nationalisation but it is nationalisation-lite.”
Despite all these concerns, commentators are unanimous in agreeing that the
bailout is good news for banks. Mr Clarke says: “Given the dramatic falls of
about 40 per cent in the shares of banks such as HBOS and RBS on the day
before the bailout announcement, the sector will be relieved to obtain some
stability through this deal.”
Mr Urquhart Stewart adds: “This may be a bitter pill to swallow, but the
medicine should prove beneficial in the long run. Unless they actually need
the cash, bank shareholders should not be selling now. In fact, if you are
prepared to take a five-year view and don't think that we are heading for
total disaster, bank shares are looking quite attractive.”
That is also the view of some contrarian investors, including Anthony Bolton,
the celebrated former manager of the Fidelity Special Situations fund, who
is now putting some of his own money in bank shares. Mr Bolton believes that
it would now make sense to buy a broad basket of financial shares. After
months of falling share prices, the valuations on many financial stocks are
looking extremely cheap and he thinks that the better-capitalised banks are
well placed to profit from any recovery.
James Henderson, of the Lowland investment trust, is even more bullish. He
started buying into them nine months ago and believes that they remain good
value despite the events of the past week.
Mr Henderson is another who thinks that most of the bad news is probably
already in the share price and there is now considerable upside potential.
He has put money into HSBC and RBS, which are now the fourth and
fifth-biggest holdings in his portfolio.
He concedes that he may have moved back into banks and builders a little
early, but investors would do well to respect his overall judgment because,
like Mr Bolton, he has an outstanding track record.
Another very experienced manager who is running against the tide is Bill Mott,
of PSigma Income. Mr Mott's fund has bought stakes in six banks, totalling
12 per cent of the portfolio.
However, most fund managers still believe that it is too soon to buy into
banks and builders. Among them is Neil Woodford, who runs the Invesco
Perpetual Income and High Income funds and is one of the UK's most
successful fund managers.
Mr Woodford foresaw the arrival of the credit crunch long before it actually
struck last year and he had unloaded all his bank stocks before the sector
started to tumble. Despite the heavy falls since Mr Woodford baled out, he
still is not tempted to buy back in.
Case study
While some fund managers are buying back into banks, many disillusioned
private investors are counting their losses.
Eddie Johnson, a retired journalist from Middlesbrough, bought Bradford &
Bingley shares for his granddaughter, Bethany, when the former building
society floated on the stock market in 2000.
Mr Johnson says: “I had started a savings account for Bethany and when the
society converted to a bank we were offered shares in the company. Both I
and Bethany's mother agreed that we would buy some and then bought more in
this year's rights issue. We thought that B&B would be as safe as it
gets, but we were proved wrong.”
