January 18, 2013 5:09 pm

Banks: glimmers of hope

Developments this week offer fuel for both bears and bulls

Time to take profits? Anyone who has owned bank shares over the past six months is sitting on a tidy gain. The MSCI World Banks Index is up a fifth, and some of the big names are up more than that – Barclays is up 85 per cent, Citigroup 50 per cent.

Developments this week offered fuel for both bears and bulls. The bears can point to evidence that the industry has still not got over the past and is struggling to adapt to a less ambitious future. Profits at both Citi and Bank of America were reduced by payments for mortgage-related failures, while neither made much progress in cutting pay. BofA, for example, still gives 40 per cent of investment banking revenues to its staff. In the UK, Goldman Sachs had to row back from a plan to time bonus payments to coincide with a tax cut, while the domestic banks’ request for a time limit on claims for mis-sold insurance suggests they are still misreading the public mood.

The bulls end the week feeling smug too. Morgan Stanley – helped by a good performance in wealth management – followed the example set by Goldman and JPMorgan with earnings that beat forecasts. Pay as a proportion of revenue fell in the investment banking units of all three as they cut staff. And in the UK, a strongly worded note to staff from Barclays chief executive Antony Jenkins said anyone not buying into the bank’s “values” could leave.

A glimmer of hope, but little more than that. The fundamentals remain troubling – an uncertain economic recovery, regulatory noise about the need for more capital, and profits that are consistently reduced by “one-offs”. Banks in Europe trade at 0.8 times tangible book value; the better US banks trade above that. To justify – let alone improve – such valuations, the banks will need to prove that the glimmers are getting stronger and more permanent.

Email the Lex team in confidence at lex@ft.com

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