Reforms proposed this week could make British bank shares attractive again, ringfenced from investment banking risk, but in the short term they are irrelevant to investors running scared of the euro zone debt perils.
A government-sponsored commission unveiled reforms on Monday that said banks should shield retail units from riskier investment banking and hold billions more in extra capital.
Many investors, while broadly supportive in principle, said the measures were being overshadowed by threats to the global banking sector from Europe that will inevitably hit banks in Britain if the crisis deepens.
"You could paint a fairly credible scenario in which ... all the best laid plans get swept away in a tidal wave of dreadfulness emanating from Europe," said Rob Burgeman, a divisional director at investment manager Brewin Dolphin , who sits on the asset allocation committee.
Investment managers also warned that the protracted timetable for implementation, aimed at deferring the impact on an already beleaguered industry, meant the reforms would have no benefit in an immediate crisis.
The Independent Commission on Banking (ICB) recommended the reforms be completed by 2019, to take into account the current economic environment.
"(By) delaying it for seven years, all sorts of things can happen between now and then," said Savvas Savouri, chief economist and partner at Toscafund.
European bank shares are trading at around 0.6 times book value, according to Thomson Reuters data, reflecting worries about the health of balance sheets in the face of a deepening economic crisis.
The STOXX Europe 600 banking index has tumbled 40 percent this year, while Britain's FTSE 350 Banks Index has dropped a more modest 32 percent.
"There's just so many bloody awful things, it's difficult to get a clear picture at the moment," said a senior British equities fund manager at a large British investment house.
The authors of the reform plan said investors should be prepared to take lower returns for a safer investment. Banks' profitability has already been hit as leverage is reduced and global rules require them to hold more capital, and the ICB proposals take that process a step further, potentially knocking 10 billion pounds ($16 billion) a year from British banking profits.
"If you live in a world where the real rate of interest on safe government bonds is half a percent or less, you might wonder if you can reasonably expect a reasonably safe return of 15 percent on equity in a bank," said Martin Wolf, one of the five ICB members.
"Maybe they (investors) are being unrealistic, and after a while will realise that a lower return is attractive and is reasonably safe and solid. That's where we want to go," he said on Monday.
Many investors contacted by Reuters agreed that if the reforms created a class of UK retail banks with earnings not subject to the volatility and risk associated with investment banking, they could indeed make appealing investments.
But while the sovereign debt crisis tightens its grip round Europe's throat, the appeal is likely to remain hypothetical.
Source: www.reuters.com
A government-sponsored commission unveiled reforms on Monday that said banks should shield retail units from riskier investment banking and hold billions more in extra capital.
Many investors, while broadly supportive in principle, said the measures were being overshadowed by threats to the global banking sector from Europe that will inevitably hit banks in Britain if the crisis deepens.
"You could paint a fairly credible scenario in which ... all the best laid plans get swept away in a tidal wave of dreadfulness emanating from Europe," said Rob Burgeman, a divisional director at investment manager Brewin Dolphin , who sits on the asset allocation committee.
Investment managers also warned that the protracted timetable for implementation, aimed at deferring the impact on an already beleaguered industry, meant the reforms would have no benefit in an immediate crisis.
The Independent Commission on Banking (ICB) recommended the reforms be completed by 2019, to take into account the current economic environment.
"(By) delaying it for seven years, all sorts of things can happen between now and then," said Savvas Savouri, chief economist and partner at Toscafund.
European bank shares are trading at around 0.6 times book value, according to Thomson Reuters data, reflecting worries about the health of balance sheets in the face of a deepening economic crisis.
The STOXX Europe 600 banking index has tumbled 40 percent this year, while Britain's FTSE 350 Banks Index has dropped a more modest 32 percent.
"There's just so many bloody awful things, it's difficult to get a clear picture at the moment," said a senior British equities fund manager at a large British investment house.
The authors of the reform plan said investors should be prepared to take lower returns for a safer investment. Banks' profitability has already been hit as leverage is reduced and global rules require them to hold more capital, and the ICB proposals take that process a step further, potentially knocking 10 billion pounds ($16 billion) a year from British banking profits.
"If you live in a world where the real rate of interest on safe government bonds is half a percent or less, you might wonder if you can reasonably expect a reasonably safe return of 15 percent on equity in a bank," said Martin Wolf, one of the five ICB members.
"Maybe they (investors) are being unrealistic, and after a while will realise that a lower return is attractive and is reasonably safe and solid. That's where we want to go," he said on Monday.
Many investors contacted by Reuters agreed that if the reforms created a class of UK retail banks with earnings not subject to the volatility and risk associated with investment banking, they could indeed make appealing investments.
But while the sovereign debt crisis tightens its grip round Europe's throat, the appeal is likely to remain hypothetical.
Source: www.reuters.com
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