Rupert Hargreaves, 10 November 2014
The godfather of value investing, Benjamin Graham, made it quite clear that the process of investing is nothing like speculation: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.” On the other hand, speculation is more akin to gambling, with no return guaranteed.
With this in mind, it’s easy to arrive at the conclusion that banks, which rely on leverage and trading to make a living, can never be deemed true ‘investments’ due to the speculative nature of their businesses. And this is the reason why I’m staying away from banks like Royal Bank of Scotland (LSE: RBS), HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN).
Mistakes of the past
Aside from the complexity of bank balance sheets, banks are still being forced to pay for their mistakes of the past. Hefty fines being levied by regulators are digging into bank reserves, denting profitability and threatening dividend payouts.
RBS, for example, announced within third quarter results a £400m provision to cover possible foreign exchange market manipulation fines. Similarly, during the third quarter HSBC set aside $1.6bn in regulatory provisions, including $378m to cover potential fines for alleged rigging in the foreign exchange markets. These provisions pushed the group’s overall operating expenses 15% higher during the quarter.
Meanwhile, as well as facing a rising level of loan impairments, Standard Chartered is having to pay a constant stream of fines to regulators following lapses in the bank’s internal systems and controls.