Party manifestos have a tendency to be a list of eye-catching pledges or wish lists than anything else, and while most people rarely read them cover to cover, the pledges in them still need to be assessed given the impact some of them might have, if implemented in part or in full.
Given the electoral deadlock being played out in the polls some of the more radical measures may never make the transition from paper to reality, but investors still need to be aware of them, particularly given that the sector as a whole is trading at its best levels in over a year.
In the event that the Labour party is able to form a government and able to implement its manifesto pledges after the election on May 8th, then investors need to focus on the banking sector whoever gets in, given that all parties have measures that will affect the banks.
The Labour Party though has the most radical ones over and above the Conservatives and LibDems:
Banks - all parties are expected to be picking the banks pockets in the next parliament, so don't expect any surprises here with the bank levy, likely to increase whoever is in power, along with a possible banker's bonus tax.
The Labour Party has also pledged to increase competition on the high street. Following the Competition and Market Authorities (CMA) inquiry they want a market share test and at least two new challenger banks. The Labour Party has also stated it will introduce a Compulsory Jobs Guarantee, paid for by a bank bonus tax, though there are no details on how this tax would be levied.
They have also pledged to increase the bank levy, as well as potentially introducing legislation limiting the number of branches any single bank can have on the high street.
The Liberal Democrats have proposed an 8% tax on the banks, in addition to the bank levy already in place.
The Conservatives don’t appear to have any specific plans to target banks further in their manifesto, but there is the likelihood that the banking levy does get increased in each new budget, and it is this prospect that has caused the more Asia focussed banks to consider moving their HQ’s, in response to shareholder concerns.
All of this is likely to be in addition to increased regulatory scrutiny, possible further fines and higher capital requirements due to changes demanded by regulators.
HSBC, current dividend yield 5.4%, and Britain’s largest bank appears to be getting to the point of re-evaluating its relationship with the UK. This is not altogether surprising given that it is very much a global bank, with its roots in South East Asia, and is only domiciled in the UK as a result of its takeover of the Midland Bank branch network in 1992.
While there is no question that all of the UK banks played a part in the financial crisis and continue to pay for past misdemeanours, but the prospect of continuous increases in the bank levy, as well as additional taxes is likely to erode shareholder value, and has already prompted discussions about a move away from the UK. While some have suggested that the reasons for the discussion of a move of tenure are down to uncertainty over Europe, it is more likely that as thebiggest UK bank HSBC will pay a larger share of any increase in the bank levy which could increase substantially more if Labour comes to power.
There has also been some talk that the bank could spin off its UK branch network, possibly reviving the Midland Bank brand in the process in order to limit its exposure to any increased levy. The costs of any move in domicile could well be quite high in the short term, which suggests any imminent move isn’t likely, but that could well depend on the political environment over the next 5-10 years.
For now the bank has a dividend cover of 1.4, which is a little on the low side, and with revenues already half of what they were in 2012, and with pre-tax profits projected to fall into 2016, shareholders are likely to continue to pressure company management further if the tax and regulatory burden threatens to put these under further strain.
Lloyds Banking Group (LONDON:LLOY), current dividend yield 0.4%, one of the UK’s oldest banks and a victim of the misguided decision to bail out Halifax Bank of Scotland, which ultimately turned a conservative well run bank into a basket case, as the bank was subsequently bailed out by the taxpayer to the tune of £20bn.
It seems well on the road to recovery in spite of having had to pay out over £10bn in PPI fines and other related costs, while it also span off its TSB operation, booking a £660m charge in the process, as it looks to comply with EU state aid rules.
The UK government has already reduced its stake in the bank from 39% to 21% in the past few months, but Lloyds doesn’t have the luxury like HSBC of moving its domicile given that it remains very much a UK focussed bank. Its main focus is on domestic and retail financial services.
As one of the bailed out UK banks the fact it has been allowed to restart paying a dividend is a net positive, having recently returned to profit, and while it isn’t likely to be impacted too hard by the bank bonus tax any measures by a new government to shrink it further could be cause for uncertainty. With a dividend cover of 10.8 it is well capable of increasing the dividend, but with the UK government still holding a sizeable stake, political risk remains a concern, albeit a diminishing one.
Barclays (LONDON:BARC) Bank, current dividend yield 2.5%, the UK’s second largest bank has had a difficult last few years, having had to tap Middle East investors in 2008 to avoid being bailed out, and narrowly missing out on what turned out to be the poisoned chalice that was ABN Amro.
Its involvement in a number of scandals from rate rigging, money laundering and tax avoidance conspired to drag its name through the mud further and saw the bank incur numerous fines from regulators around the world.
The new CEO Antony Jenkins has overseen a significant restructuring program over the past few years, cutting back on the investment banking division in particular, as the bank tries to escape the clutches of litigation that continue to drag on its brand. The bank has yet to settle its FX price rigging allegations setting aside a further £800m increasing the total to £2bn, while the dark pool allegations that arose in the middle of last year haven’t gone away either, with the case currently being assessed in the US courts.
The reintroduction of the dividend in 2014 was a welcome development as was the 12% rise in annual profits announced at the beginning of March, and this improvement could well continue into 2015, as long as the FX price rigging fine gets resolved.
The shares are up over 20% since the lows in October while any provisions for further fines are only likely to be a drag if we hear about further misdemeanours. The main concerns are in relation to more onerous capital requirements as regulators increase the scrutiny of a sector that has an uphill struggle to restore its reputation.
Royal Bank of Scotland (LONDON:RBS) was one of the UK’s largest banks until 2008, when it swallowed up ABN Amro in an ill-advised takeover which almost brought the UK banking system to its knees. Headquartered in Edinburgh it was bailed out by the UK taxpayer to the tune of £45bn and in that time it has endured a series of scandals, software glitches, and a slimming down process that would have done weight watchers proud.
The bank returned to profit last year for the first time in years and is currently looking to accelerate the sell-off of 314 branches under the old Williams and Glyns banner, with the hope it will get floated in 2016. This process is likely to act as a drag on profits given RBS will be looking to avoid the types of software glitches that have brought the bank unwelcome attention over the past few years.
The risk of further fines cannot be ruled out either with the bank still involved in a number of cases in the US related to US mortgages, and still has to settle regarding FX rigging. In that regard the bank has set aside a further £850m in respect of these misdemeanours, in a move that saw it post a loss in its latest trading update. Without these so called one-off costs the bank saw profits rise 16% in the first quarter.
The bank is still 81% owned by the UK taxpayer which suggests that further political interference in the running of the bank is highly likely.
Other UK banks include Spanish based Santander (MADRID:SAN), recently floated TSB, which is in talks with Spain’s Banco di Sabadell, the Co-operative Bank as well as Metro Bank and Virgin Money.
While there is no question that the banks had a part to play in the problems of the past few years the risk is that politician’s propensity to use the banks as cash cows for their pet political projects poses significant risks to the recovery of the UK economy.
Further regulatory fines will no doubt grab all of the headlines, but further increases to taxes and levies means less money available to pump into the domestic economy, at a time when there is some evidence of a slowdown in economic activity. The banks are already dealing with increasing capital requirements from global regulators, and the risk is that any new taxes and levies won’t raise anywhere near as much as politicians think they will.
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