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Home / Should I Buy Bank Shares?

Should I Buy Bank Shares?

UK Bank Shares

If you’re asking ‘should I buy bank shares?’, you’re not alone. It’s a popular sector, and our clients often ask us the same question. We’ll look at the facts to help you make an informed decision.

Banking on History

The recent banking crisis and subsequent effect on UK bank shares can be traced back to the deregulation of financial markets in the 1970s and 80s. It allowed banks to raise funds not only from investors, but also from money markets across the world. Controls were also relaxed on the percentage of investors’ funds that could be lent. The effect of this was to liberalise credit making it easier to borrow money.

During 2007/8, oil prices rose sharply causing fears of a trade recession, at the same time rising unemployment meant an increase in mortgage defaults. Banks became worried about the value of their mortgage books as the relaxed lending criteria meant that there were a large percentage of sub-prime mortgages (mortgages taken on by low income borrowers on low value properties). Banks became reluctant to lend to other banks, leading to serious liquidity problems.

Famously, at the end of 2007, The Bank of England provided financial support to rescue Northern Rock Building Society. Despite being one of the most popular and widely held investments amongst UK bank shares, Northern Rock was finally nationalised in February 2008. Then in September of the same year, the largest bankruptcy in the world took place when Lehman Brothers Bank failed and the US Government refused to come to their rescue.

In mid-January 2009, amid speculation of a new government bail-out package, UK bank shares fell dramatically and, just as the crisis appeared to be recovering, stocks plunged once more. Then at the end of January there was a dramatic peak in Barclays’ share price, closely followed by other UK banks. It appears that the rally followed a letter from Barclays’ chief executive to its shareholders, reassuring investors that Barclays’ resources were more than capable of riding the storm.

During the recent turmoil it has been possible to pick up UK bank shares at lower prices than in recent years. However, due to pressure, caused by low interest rates, on house prices and net interest margins, UK banks may fail to attain decent profitability for some time (or, at least, to the same degree they had enjoyed previously). However, some investors still value UK bank shares as a good long term investment.

The Royal Bank of Scotland Group (RBS)

RBS is ranked second largest bank in the world by assets. The UK Government holds an 84% stake but voting rights are limited to 75% in order for RBS to keep its listing on the London Stock Exchange. The RBS group controls The Royal Bank of Scotland PLC, National Westminster Bank and Ulster Bank.

Lloyds Banking Group

Lloyds TSB was created when Lloyds Bank and the Trustee Savings Bank merged in 1995, creating the largest bank in the world by market share. Then, in January 2009, it became Lloyds Banking Group on the acquisition of HBOS.

HSBC

First opening for business in 1865, HSBC is named after its founder member, the Hongkong and Shanghai Banking Corporation Limited. HSBC changed its headquarters to London, and became HSBC Holdings after the acquisition of Midland Bank in July 1992. HSBC Holdings shares are held by over 220,000 shareholders, and historically pay dividends on a regular basis.

Barclays

In 1690 James Barclay’s father-in-law started trading as a goldsmith banker in Lombard Street, in the City of London. Mr Barclay became a partner in 1736. The company later joined 19 other banking businesses and became Barclay and Company Limited, then in 1917 became Barclays Bank Limited. Now Barclays PLC has its world headquarters in Canary Wharf and trades in 50 countries. Barclays has historically paid regular dividends on shares, and it currently also offers a dividend reinvestment plan (DRIP). For those asking ‘should I buy bank shares’, Barclays is a common choice.

The Future

If you are thinking about investing in UK bank shares, you should consider that although prices are temptingly low, the market is very volatile and may stay like that for some time to come.

Some analysts see the prospect of another recession looming, considering the well-publicised current global challenges. Some traders are waiting for a slowdown to come to fruition, in the hope that it will present a good time to buy. Markets are always erratic and hard to predict, none more so than UK bank shares at the present time. In order to get the best perspective on future trends, investors should research thoroughly.

Conduct your own research into market trends and the myriad of conflicting predictions, along with information from Accendo Markets’ analysts. Register for our free ‘Trading Opportunities’, sent regularly to your inbox, for a unique perspective in where investment opportunities may be found. This will give you the best insight into the future of UK bank shares, enabling you to find the answer to the big question: ‘Should I buy bank shares?’

Nothing on this website should be taken as a personal recommendation. It does not take into account your personal circumstances or appetite for risk.

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