British banks becoming uninvestable, ABI warns

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British banks becoming uninvestable, ABI warns

British banks shares are becoming “uninvestable” due to opaque accounts, regulatory upheaval and political interference, a powerful investor group has warned MPs.

London, City
Investors hope the findings will serve as a warning to politicians and regulators who want the major banks to raise billions of pounds of capital to shore up their balance sheets Photo: Getty Images
Louise Armitstead

By Louise Armitstead

9:00PM GMT 17 Nov 2012

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The Association of British Insurers (ABI) says institutions are reluctant to invest in high street banks because of increasing risks and shrinking returns.

The trade group is preparing to deliver a hard-hitting report to the Parliamentary Commission on Banking Standards on behalf of its members who control £1.5 trillion assets and are among the bank’s biggest investors.

In preliminary evidence last week, the ABI told the Commission: “We are concerned that banking regulators are currently focused on financial stability at the expense of economic growth. This has a negative impact on banks’ investability.”

The ABI added: “The prospects of sustainable economic recovery in the UK are to some extent dependent on banks being able to raise the funds necessary to finance the growth of small and medium-sized companies. From the perspective of institutional investors, it is essential that banks should be an investable proposition.”

Investors hope the findings, which will be submitted in full at the end of the month, will serve as a warning to politicians and regulators who want the major banks to raise billions of pounds of capital to shore up their balance sheets.
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One shareholder said: “Regulators may decide that the banks need more capital, but we need to think carefully before we give it to them. Banks are increasingly risky and the returns are poor, there’s not much incentive to invest in them.”

In an early submission ahead of its report, the ABI said: “So far the public debate on banks’ capitalisation has reflected the views of regulators, politicians and policymakers… but not the providers of the capital – the investors. If more capital is required in the UK banking system, as recently suggested by the Financial Policy Committee, then investors need to understand first, why this is the case and, secondly, what is the likely return on the capital invested and associated risks.”

The ABI added: “If [return on equity] remains structurally below the cost of equity, the equity of banks will remain essentially uninvestable.”

The powerful investor group is taking in the views of British and international investors as well as the chairmen and chief financial officers of UK banks. The directors of UK Financial Investments, the body that manages the taxpayer states in lenders including Royal Bank of Scotland and Lloyds Banking Group, have also been consulted.

So far the ABI inquiry has revealed that institutional investors are opposed to some of the Government’s key regulatory proposals, including enacting Sir John Vickers’ plan to ringfence retail divisions from investment banking operations.

The ABI has told the Commission: “Universal banking is not viewed by most investors as an inherently broken model. While accepting that it will happen, investors so far are unconvinced about the real benefits of ringfencing and/or separation and are sceptical about the benefits relative to the operational costs and disruption.”

Investors are also concerned about a “resolution” plan to wind up banks in the event of a new financial crisis. “The risk-return of additional loss absorbency or bail-in capital is confusing the market and requires clarification,” the ABI said.

The group said “there is no doubt that equity investors want a secure and properly capitalised banking system and are supportive of regulatory reform” – but not at the cost of confidence in the system. Shareholders “require, above all,… confidence in both the future operating and regulatory environment”, the ABI said.

Last year, David Cumming, head of equities at Standard Life, warned that the Government’s “constant interference” in the banks is “unhelpful” and is in danger of damaging the lenders, small businesses and the British economy.

He said banks must be “allowed to deliver adequate returns to stakeholders. If not, debt and equity funding will become more expensive, consequently reducing their capacity to lend, thus damaging their businesses and the long-term prospects for this country’s financial sector and the economy as a whole.”

www.telegraph.co.uk/finance/newsbysector/banksandfinance/9684385/British-banks-becoming-uninvestable-ABI-warns.html