There is an old Lloyds Bank television commercial featuring those darlings of the 1980s sitcom, Jan Francis and Nigel Havers.
Francis’s character has just bought a house from Havers and the ad has the pair bumping into each other at the supermarket checkout. The encounter prompts Francis to give Havers a few unsolicited personal finance lessons, by explaining how her new Lloyds banking card means she has to write fewer cheques (it’s debatable whether the ad is dated more by the plot or the actors).
Havers then explains he’s already got one and flashes it to prove the point. “Gold,” Francis observes through grating gnashers. To which Havers shoots back: “I did rather well out of the sale of the house.”
This sums up the financial industry rather well, in that there are two parties, both impossibly smug, who delight in getting one over on each other financially. It is useful to have in mind as an analogy of how this industry works, as this week the banking sector’s reporting season really gets going. We have results from Lloyds, HSBC and Barclays, all of which follow the numbers from Royal Bank of Scotland on Friday, when the 62%-state-owned lender unveiled a doubling of profits (from a very low base) and fresh dividend payouts that will mean nearly £1bn heading to government coffers.
Essentially RBS, which, like Lloyds, is in effect only exposed to the UK, kicked off the season by saying that it is doing just excellently – while issuing warnings about the domestic economy in 2019. It is hard to envisage that rivals won’t use a similar line this week, although the argument “we are doing splendidly, even though the economy might tank” seems a curious sales pitch. Bank shares are in effect a proxy on the health of, er, the economy and these concerns come at a point when RBS and Lloyds are looking at using some of their cash to buy back shares.
In a normal context buybacks – where a company acquires its own shares from investors and then cancels them in order to make its investment statistics look better – are often controversial. By definition, buybacks intend to punish the shareholders who sell and benefit those who don’t, which in RBS’s case involves the taxpayer. Theoretically, the practice boosts earnings per share (helpful for executive share options) at no real risk to the bosses. But that reading assumes the company is buying back shares that are cheap and that the strategy has not been alighted on by a management team that has run out of other ideas. After a terrible 2018, RBS and Lloyds shares are certainly cheaper, but they might not be cheap. As Francis found out at the supermarket, you can suddenly discover you’ve ended up on the losing side of a zero-sum game.
Aside from the news on profits and dividends, RBS trotted out the usual Brexit caveats on Friday and warned that impairments were expected to rise this year. The Bank of England also said earlier this month there was a 25% risk of a UK recession in 2019.
There are, of course, positive arguments about why the shares might soon rise – Brexit doesn’t turn out as badly as many predict, the UK and the EU do a deal, as do the US and China on trade – while banking analysts almost universally advise punters to buy or hold bank shares.
But banking analysts tipped RBS and Lloyds paper all the way in 2018. One day their cheery view will be right and, just like Francis and Havers, they will crow about their financial brilliance. It’s just not immediately obvious that that moment of triumph is imminent.
