Comment: Value is returning to Britain’s banks

CURIOUSLY, banking may be returning as the prodigal son to investor affections. Perhaps not quite a case of let’s kill the fatted calf instead of the fat cat, but various factors suggest the sector’s time as an endemically flawed stock market pariah is over.

Martin Flanagan. Picture: Adrian Lourie
Martin Flanagan. Picture: Adrian Lourie

There is now strong speculation – neither confirmed nor denied by the bank – that HSBC is sounding out investors about a flotation of its UK arm. It is said the HSBC board has been considering the merits of selling off 30 per cent or so of UK retail and commercial banking operation in a public listing.

The idea is that such a partial demerger would release value from the high street business of the global giant and address regulatory pressures.

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Industry sources doubt anything is imminent, but HSBC would hardly entertain the idea at all unless the group thought the market pricing of such a move would be advantageous.

Analysts believe the business, a “steady Eddie” in the bank’s global footprint, could float with a stock market value of about £20 billion. If true, it fits into the wider picture of bluer skies for the banking industry.

Sector share prices are well off their troughs during the financial crash. Shares in Lloyds, the almost totally UK-centric bank among the Big Four, have risen well over two-thirds in 2013.

Banking profitability (apart from at the special case that is Royal Bank of Scotland) has returned. The government has started selling down its stake in Lloyds, with the bank set to float its TSB subsidiary next summer.

RBS reckons it could get a good price on Wall Street for a flotation of Citizens Bank by late 2014, and also plans to float more than UK 300 branches under the old Williams & Glyn’s brand in 2015.

Santander UK and Virgin Money have also indicated a keen interest in a public listing, and National Australia Bank may even look once again at possibly selling Clydesdale and Yorkshire Banks.

This is a world away from the Apocalyptic predictions of four or five years ago, when investors saw banks collapsing (such as Lehmans, Bear Stearns, Northern Rock) or only warding off collapse through taxpayer bailouts (RBS, UBS, Citigroup, and others). The truth is that we have come through the collapse, the resulting recession, the shored up balance sheets and out of the tunnel of toxic bad debts.

Instead, banks are now seen as likely to ride the slowly gathering upturn with better risk systems and controls in place.

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HSBC has no need in macro terms to float its UK business. But, longer term, such a move may be surefooted.

As the saying goes, if you can hear the bandwagon it is too late to jump on it. Those who float assets early rather than late may catch the investor tide before the next cyclical downturn.