For more than a decade, everybody hated the big banks after their bonus-fuelled speculation triggered the global financial crisis in 2008 and subsequent Great Recession.
The collapse of Lehman Brothers in September 2008 remains the largest bankruptcy in US history, involving more than $600 billion in assets.
Most banks only survived due to multibillion-dollar taxpayer bailouts yet carried on as before, lavishing senior staff with generous pay settlements and yet more bonuses.
So, a strange thing happened when the next big global crisis came along, in the shape of the coronavirus pandemic.
The banks weren’t to blame! Stranger still, this time they didn’t need billions in bailouts or government support, either.
The hard work that regulators had put in since the financial crisis had left the sector in a relatively good state, with solid balance sheets and a healthy cushion of capital.
Yet investors still don’t trust them. Bad memories linger and many banking stocks remain well below their pre-financial crisis highs.
Take UK bank Lloyds Banking Group, which was subject to a £20.3bn ($28.3bn) bailout in 2008. In 2007, just before the credit crunch, its share price peaked at 591 pence. Today, it trades at just 47p.
The banks have lost investors a lot of money. Yet many sense an opportunity today as the global economy recovers in the wake of the Covid-19 pandemic. Is it time to forgive the banks and buy their shares?
The big US banks have just been through their reporting season and the results have been stunning. The big four – Wells Fargo, Bank of America, Citigroup and JP Morgan Chase – posted a combined $33bn in profits, thrashing analyst estimates of about $24bn, Reuters reports.
This is up from $6bn a year ago, when the pandemic was squeezing the life out of the economy.
US investment banks also cashed in. Goldman Sachs' profit doubled to $5.35bn while Morgan Stanley’s revenue hit $2.83bn, about $400 million higher than expected.
UK banks are now reporting and it looks like the same story, with Barclays posting a record first-half rebound on Tuesday. Pre-tax profits for the year to June 30 topped £5bn, almost quadruple last year’s £1.3bn.
On Thursday, Lloyds Banking Group posted pre-tax profit of £3.9bn, against a first-half loss of £602m last year.
During the first lockdown, both banks set aside billions to cover potential bad debts as businesses and jobs crumbled during Covid-19-induced movement restrictions. But thanks to job furlough programmes, the impairments haven’t happened.
Barclays and Lloyds have now restarted dividends, which the British government had ordered them to stop a year ago.
Despite these stunning figures, conditions are not ideal for the banking industry right now as the pandemic has made consumers and businesses cautious, Nicholas Hyett, equity analyst at Hargreaves Lansdown, says.
The recession, while sudden and steep, was short. Loan losses are much lower than feared
Glyn Owen,
investment director, Momentum Global Investment Management
Rather than loading up on debt, they are paying it down. “That trend is slowing as the economy reopens, but it’s a headache for the banks, nonetheless,” he says.
Global banking stocks fell by about 45 per cent at the start of the pandemic, according to MSCI, much faster than shares generally, Glyn Owen, investment director at fund manager Momentum Global Investment Management, says.
Yet, to many people’s surprise, the banks have emerged from Covid-19 in “excellent financial health”. “The recession, while sudden and steep, was short. Loan losses are much lower than feared,” Mr Owen says.
The recovery is largely priced into their shares, with the banking sector having doubled from the lows of March 2020.
For example, Wells Fargo's share price is up 87 per cent in the past 12 months while Bank of America and JPMorgan Chase are both up about 60 per cent and Citigroup has grown by 36 per cent.
In the UK, Lloyds' share price is up 60 per cent in a year, just ahead of Barclays at 55 per cent.
The quick gains have already been made, but Mr Owen says this can still be a rewarding sector, thanks to loose monetary policy, big fiscal spending programmes and pent-up customer demand.
“Banks usually perform well in the early stages of an economic upswing as demand for loans grows and customer defaults fall,” Mr Owen says.
They should also benefit as the US Federal Reserve tightens policy and potentially increases interest rates, he says. This should improve net lending margins, which is the difference between what banks pay customers for deposits and earn from lending the money as mortgages and loans.
“Interest rate and bond yield rises are likely to be some way off and gradual, but will improve bank margins,” Mr Owen says.
Lenders with investment banking divisions should also benefit from buoyant capital markets, he says.
They [banks] need to invest heavily in digitisation to fight back, while earnings growth could prove hard given record global debt levels
Russ Mould,
investment director, AJ Bell
Banks have been liberated to reward shareholders with dividends and share buybacks.
“They are flush with excess capital and can start returning some of this to shareholders, offering the potential for above average dividend yields on top of capital appreciation,” Mr Owen says.
While some worry about the rise of app-based “challenger” banks and FinTech, Mr Owen reckons they have a long way to go to defeat the big banking beasts and may be overpriced.
“Revolut was valued at $33bn in its latest funding round, bigger than NatWest, yet its $361m revenues are dwarfed by NatWest’s $15bn,” he says.
The banking stock recovery has slowed lately, with the S&P Global 1200 Banks index down 10 per cent from its May peak, Russ Mould, investment director at AJ Bell, says.
“Fears of another Covid-19 wave and a slower-than-expected emergence from lockdowns have made investors more risk averse. Also, bond yields are falling rather than rising and central banks seem in little hurry to raise rates,” Mr Mould says.
Banks also face fundamental challenges, he says, including rock-bottom interest rates, low bond yields, tight margins and ongoing regulatory scrutiny.
“They need to invest heavily in digitisation to fight back, while earnings growth could prove hard given record global debt levels,” Mr Mould says.
The boom in new stock market flotations and mergers and acquisition activity is generating plentiful fees, but today’s low market volatility does not help investment bank traders, he says.
“There is also the nagging fear that a stock market accident of some kind is lurking after the stunning run of the last 12 years,” according to Mr Mould.
Regulatory stress tests suggest banks are well placed to withstand a global downturn, stock market crash and a housing market slump, Mr Mould says. “However, the collapse of Greensill Capital, a financial services company based in the UK and Australia, and New York-based hedge fund Archegos Capital Management shows that in this sector, nothing can be taken for granted.”
UK banks look relatively cheap on a price-to-book basis and offer generous dividend yields, Mr Mould says. Barclays is forecast to yield 3.7 per cent over the next year while Lloyds is expected to generate income of 4.7 per cent. These could climb to 5 per cent or 6 per cent over time.
European banks UBS and Credit Suisse have strong investment banking and wealth management arms, which guarantee them loyal customers and steady customer fees, he says.
Banking stocks remain attractive for investors with a moderate risk appetite
Vijay Valecha,
chief investment officer, Century Financial
“The US banks offer high returns on equity, exposure to the world’s largest economy and in the case of Citi, JP Morgan Chase and Bank of America, financial market exposure via their investment banking arms.”
The decision is down to you, Mr Mould says. “The banks will tempt optimists who think the pandemic is beaten, a strong recovery will follow and inflation will drive up interest rates. Pessimists who think the West is following Japan into a deflationary debt funk will avoid them at any price.”
Banking stocks remain attractive for investors with a moderate risk appetite, Vijay Valecha, chief investment officer at Century Financial in Dubai, says. “JP Morgan Chase and Bank of America are my top picks among US banks.”
Most private investors should spread their risk by investing in a low-cost, globally diversified exchange-traded fund (ETF) rather than individual stocks, and Mr Valecha tips the Financial Select Sector SPDR Fund.
Other popular banking ETFs include Fidelity MSCI Financials, Vanguard Financials ETF and the SPDR S&P Bank ETF.
What sanctions would be reimposed?
Under ‘snapback’, measures imposed on Iran by the UN Security Council in six resolutions would be restored, including:
- An arms embargo
- A ban on uranium enrichment and reprocessing
- A ban on launches and other activities with ballistic missiles capable of delivering nuclear weapons, as well as ballistic missile technology transfer and technical assistance
- A targeted global asset freeze and travel ban on Iranian individuals and entities
- Authorisation for countries to inspect Iran Air Cargo and Islamic Republic of Iran Shipping Lines cargoes for banned goods
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Read more about the coronavirus
HIJRA
Starring: Lamar Faden, Khairiah Nathmy, Nawaf Al-Dhufairy
Director: Shahad Ameen
Rating: 3/5
Quick pearls of wisdom
Focus on gratitude: And do so deeply, he says. “Think of one to three things a day that you’re grateful for. It needs to be specific, too, don’t just say ‘air.’ Really think about it. If you’re grateful for, say, what your parents have done for you, that will motivate you to do more for the world.”
Know how to fight: Shetty married his wife, Radhi, three years ago (he met her in a meditation class before he went off and became a monk). He says they’ve had to learn to respect each other’s “fighting styles” – he’s a talk it-out-immediately person, while she needs space to think. “When you’re having an argument, remember, it’s not you against each other. It’s both of you against the problem. When you win, they lose. If you’re on a team you have to win together.”
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Ferrari 12Cilindri specs
Engine: naturally aspirated 6.5-liter V12
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The Two Popes
Director: Fernando Meirelles
Stars: Anthony Hopkins, Jonathan Pryce
Four out of five stars
MATCH INFO
Norwich City 1 (Cantwell 75') Manchester United 2 (Aghalo 51' 118') After extra time.
Man of the match Harry Maguire (Manchester United)
BlacKkKlansman
Director: Spike Lee
Starring: John David Washington; Adam Driver
Five stars
A German university was a good fit for the family budget
Annual fees for the Technical University of Munich - £600
Shared rental accommodation per month depending on the location ranges between £200-600
The family had budgeted for food, books, travel, living expenses - £20,000 annually
Overall costs in Germany are lower than the family estimated
As proof that the student has the ability to take care of expenses, international students must open a blocked account with about £8,640
Students are permitted to withdraw £720 per month
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West Asia rugby, season 2017/18 - Roll of Honour
Western Clubs Champions League - Winners: Abu Dhabi Harlequins; Runners up: Bahrain
Dubai Rugby Sevens - Winners: Dubai Exiles; Runners up: Jebel Ali Dragons
West Asia Premiership - Winners: Jebel Ali Dragons; Runners up: Abu Dhabi Harlequins
UAE Premiership Cup - Winners: Abu Dhabi Harlequins; Runners up: Dubai Exiles
UAE Premiership - Winners: Dubai Exiles; Runners up: Abu Dhabi Harlequins
Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
- Discounts on sales price of off-plan units
- Flexible payment plans from developers
- Mortgages with better interest rates, faster approval times and reduced fees
- DLD registration fee can be paid through banks or credit cards at zero interest rates
UAE currency: the story behind the money in your pockets
Specs
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2018 ICC World Twenty20 Asian Western Regional Qualifier
The top three teams progress to the Asia Qualifier
Final: UAE beat Qatar by nine wickets
Third-place play-off: Kuwait beat Saudi Arabia by five runs
Table
1 UAE 5 5 0 10
2 Qatar 5 4 1 8
3 Saudi 5 3 2 6
4 Kuwait 5 2 3 4
5 Bahrain 5 1 4 2
6 Maldives 5 0 5 0
Dhadak 2
Director: Shazia Iqbal
Starring: Siddhant Chaturvedi, Triptii Dimri
Rating: 1/5
South and West: From a Notebook
Joan Didion
Fourth Estate
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
How to help
Send “thenational” to the following numbers or call the hotline on: 0502955999
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UAE central contracts
Full time contracts
Rohan Mustafa, Ahmed Raza, Mohammed Usman, Chirag Suri, Mohammed Boota, Sultan Ahmed, Zahoor Khan, Junaid Siddique, Waheed Ahmed, Zawar Farid
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Specs
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Key findings of Jenkins report
- Founder of the Muslim Brotherhood, Hassan al Banna, "accepted the political utility of violence"
- Views of key Muslim Brotherhood ideologue, Sayyid Qutb, have “consistently been understood” as permitting “the use of extreme violence in the pursuit of the perfect Islamic society” and “never been institutionally disowned” by the movement.
- Muslim Brotherhood at all levels has repeatedly defended Hamas attacks against Israel, including the use of suicide bombers and the killing of civilians.
- Laying out the report in the House of Commons, David Cameron told MPs: "The main findings of the review support the conclusion that membership of, association with, or influence by the Muslim Brotherhood should be considered as a possible indicator of extremism."
The smuggler
Eldarir had arrived at JFK in January 2020 with three suitcases, containing goods he valued at $300, when he was directed to a search area.
Officers found 41 gold artefacts among the bags, including amulets from a funerary set which prepared the deceased for the afterlife.
Also found was a cartouche of a Ptolemaic king on a relief that was originally part of a royal building or temple.
The largest single group of items found in Eldarir’s cases were 400 shabtis, or figurines.
Khouli conviction
Khouli smuggled items into the US by making false declarations to customs about the country of origin and value of the items.
According to Immigration and Customs Enforcement, he provided “false provenances which stated that [two] Egyptian antiquities were part of a collection assembled by Khouli's father in Israel in the 1960s” when in fact “Khouli acquired the Egyptian antiquities from other dealers”.
He was sentenced to one year of probation, six months of home confinement and 200 hours of community service in 2012 after admitting buying and smuggling Egyptian antiquities, including coffins, funerary boats and limestone figures.
For sale
A number of other items said to come from the collection of Ezeldeen Taha Eldarir are currently or recently for sale.
Their provenance is described in near identical terms as the British Museum shabti: bought from Salahaddin Sirmali, "authenticated and appraised" by Hossen Rashed, then imported to the US in 1948.
- An Egyptian Mummy mask dating from 700BC-30BC, is on offer for £11,807 ($15,275) online by a seller in Mexico
- A coffin lid dating back to 664BC-332BC was offered for sale by a Colorado-based art dealer, with a starting price of $65,000
- A shabti that was on sale through a Chicago-based coin dealer, dating from 1567BC-1085BC, is up for $1,950
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MATCH INFO
Manchester City 3 (Sterling 46', De Bruyne 65', Gundogan 70')
Aston Villa 0
Red card: Fernandinho (Manchester City)
Man of the Match: Raheem Sterling (Manchester City)
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Specs
Engine: Duel electric motors
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FFP EXPLAINED
What is Financial Fair Play?
Introduced in 2011 by Uefa, European football’s governing body, it demands that clubs live within their means. Chiefly, spend within their income and not make substantial losses.
What the rules dictate?
The second phase of its implementation limits losses to €30 million (Dh136m) over three seasons. Extra expenditure is permitted for investment in sustainable areas (youth academies, stadium development, etc). Money provided by owners is not viewed as income. Revenue from “related parties” to those owners is assessed by Uefa's “financial control body” to be sure it is a fair value, or in line with market prices.
What are the penalties?
There are a number of punishments, including fines, a loss of prize money or having to reduce squad size for European competition – as happened to PSG in 2014. There is even the threat of a competition ban, which could in theory lead to PSG’s suspension from the Uefa Champions League.
UAE currency: the story behind the money in your pockets
