UK bank investors caught in political limbo

UK Bank Investors are Worried of Excessively Strong  Regulations

UK Bank Investors are Worried of Excessively Strong Regulations

As political and regulatory issues loom on the horizon, a clutch of Britain’s fund managers are trying to figure out if their investment in the country’s banks is a sound decision even as the banking sector continues to struggle in tough economic conditions.

“It’s difficult to invest on fundamentals at the moment. It’s all political, said Fred Rizzo of asset management firm T Rowe Price.

The British fund managers have now started lobbying with the Chancellor George Osborne, augmenting the British banks’ own effort to convince the government not to introduce any draconian law that can prove detrimental for the banking sector.

Fidelity has already argued with the government that the newly commissioned Independent Commission on Banking (ICB), mandated to conduct a review of the country’s banking sector, may suggest excessive punitive measures in the name of financial stability and fair competition. Standard Life and Schroder are expected to follow suit from next year.

The interim report submitted by the ICB in April proposing two key measures has all the shareholders’ attention. The ICB had suggested that British banks ringfence their core operations, like domestic retail operation, to protect them from earnings volatility, and the Lloyds Banking Group sell substantially higher number of branches than the 632 originally proposed by the European Commission on competition.

To make matters worse, regulators at the FSA and the Bank of England are considering higher capital requirements for banks than currently in force in other countries.

“Don’t underestimate the government’s overriding aim to see systemically safer financial institutions with more capital. Getting to that point will take a long time and it is unlikely to be lucrative for equity shareholders”, said Neil Woodford of Invesco, who has a long-term bearish view on banks.

“There is a feeling that the ICB isn’t listening and has made up its mind”, said one investor.

However, apparently the groundwork seems to yield some results as George Osborne urged the ICB this week to be pragmatic about the number of branches Lloyds should be selling.

Once the ICB’s final report comes out in September and the new global capital requirements for banks published in November, the government should start offloading its stakes in RBS and Lloyds.

“It is not just that the government wants us to buy more shares but that it wouldn’t be helpful to them if we were to sell the shares we have. The government needs us and doesn’t seem to realise it, yet”, said one investor.

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