If the banks were schoolboys, they would be spending a lot of time in detention, being suspended or possibly excluded. If it wasn’t the manipulation of interest rates, mis-selling insurance policies to their customers, it was bringing the financial system as we know it to its knees, together with the odd spell of currency rigging. I think it is fair to say that their collective previous convictions would easily condone a substantial custodial sentence. Is it right, therefore, that our political leaders recoup some of these past misdemeanours by way of their own restorative justice? Well, the annual levy on banks, which was introduced in 2010, brings in around £2.5 billion annually. If Danny Alexander and the Liberal Democrats have their way, that will increase to £3.5 billion annually, his rationale being:
“Liberal Democrats believe that we must balance the books and do so fairly, so it is only right to reconsider whether banks are making a fair contribution to deficit reduction. This tax would remain in place until that job is complete.”
On The Mend?
Mr Alexander asserted the the banks had now recovered enough after the financial crisis to be able to withstand the proposed increase in the banking levy. Last Thursday, RBS (LSE: RBS) reported its seventh consecutive loss. This was caused by a write-down on its stake in Citizens, the US bank it floated last year, and £1.2 billion of new misconduct and litigation charges.
The following day, Lloyds (LSE: LLOY) spread a degree of cheer among investors by returning to the dividend list and announcing that profit before tax had more than quadrupled from that of 2013. It is also believed that the government will continue to reduce their position, albeit at only 15% of the daily volume of shares traded. Equity income funds are expected to start to buy in on the basis that the company now pays a dividend. Brokers are expecting a forward yield of just over 3.5%
Yesterday, Barclays (LSE: BARC) announced that pre-tax profits at fell by 21% to £2.3 billion in 2014 as it made a total of £1.25 billion in forex provisions and set aside a further £1.1bn for PPI mis-selling compensation. This masked an improvement in adjusted profits, which rose to £5.5 billion in 2014.
Don’t Rush In!
It seems like the banks are indeed recovering from the financial crisis, and provisions for past mis-steps will be forgotten about in time. However, with a Budget and General Election around the corner, I think that it would be wise to sit back and watch from the sidelines. I suspect that this sector could yet see further regulation, increased fines for the latest series of wrongdoings and an increased banking levy if we were to have another hung parliament…