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Banks own control nations wealth { October 23 2004 } Original Source Link: (May no longer be active)
http://business.timesonline.co.uk/article/0,,8211-1324620,00.htmlhttp://business.timesonline.co.uk/article/0,,8211-1324620,00.html
October 23, 2004
What next after the rise and rise of the banks?
By Patrick Hosking
ONE of the things that long-term investors ignore at their peril is how technology, competition and politics can dramatically puff up and then shrink back entire sectors of the stock market.
Railway shares accounted for a locosized 49 per cent of the British market in 1899, but just 0.3 per cent a century later. Telephone and telegraph shares were 2.5 per cent of the market at the end of Queen Victoria’s reign, zero in 1950 but back up to 14 per cent by 2000.
Banking and financial stocks were 15 per cent of the market in 1899, 10 per cent in 1950 and 17 per cent in 2000, and today are a thumping 27 per cent. The banks currently account for a huge chunk of the nation’s wealth and an even-larger portion of national profits.
Of the ten biggest listed companies in Britain, five of them are banks. HSBC, our second-biggest company, weighs in at £99 billion. Only BP is larger. Royal Bank of Scotland is fourth, Barclays sixth, HBOS ninth and Lloyds TSB tenth. A generation ago, not one bank made the top ten, then dominated by manufacturers such as ICI and GEC. Today you’d need 93 GECs (now Marconi) to buy an HSBC.
Banks have had a tremendous decade: £1,000 invested in a basket of bank stocks in 1994 with all dividends reinvested would be worth £4,700 today. The same sum in the FTSE 100 stocks would only have grown to £2,100.
In the US the financial sector supplied just 4 per cent of total corporate profits in 1982, but supplies 38 per cent now, a pattern seen across the Anglophone world.
Why? It is because of a combination of near-perfect conditions for banks, according to a thoughtful new analysis from Fox-Pitt Kelton, the investment bank that specialises in the financial sector.
First, falling inflation and interest rates have boosted investment returns and ended the boom-to-bust cycles that inevitably led to huge write-offs of debt.
Secondly, consumer borrowing has mushroomed far faster than overall economic growth as attitudes to debt have relaxed and interest costs have come down.
Thirdly, banks have basked under a more relaxed regulatory regime, which has allowed them to expand into new areas and has produced an explosion of new products, such as derivatives.
Unfortunately, according to Fox-Pitt, these benign conditions are all largely played out. “This is as good as it gets,” says Robin Evans, Fox-Pitt’s global strategist. The positive forces of the past will at best be neutral in future and at worst turn negative. For example, the economy cannot get much more stable, but could get less so. A collapse in the US dollar, a permanently high oil price or a hard landing for China could all cause a shock.
The dividend from the defeat of inflation has all been paid out. Cutting inflation any further would not be a boon, but simply trigger deflationary problems that would hurt the banks.
Consumers are already loaded up with borrowings and it seems likely that debt accumulation from here on in will be at a much slower pace and could even turn negative as debts are paid off.
The regulatory outlook, too, is less favourable. Banks face tougher capital requirements and more hostile treatment from politicians and ratings agencies.
Then there is the scope for financial shocks — events such as the collapse in 1998 of Long Term Capital Management, the hedge fund, which hit financial stocks disproportionately hard.
Fox-Pitt thinks that, after a six-year lull, we may be due a fresh crisis, and its analysis points to “a high level of complacency amongst both investors and economic policymakers”.
With $200 trillion (£109 trillion) of derivatives outstanding between the world’s banks, no one who has read Warren Buffett’s brilliant critique of the derivatives industry can entirely sleep easy. The world’s big banks are too big to be allowed to fail, but that doesn’t mean there couldn’t be a serious shock to the system.
It’s impossible to imagine a world without banks, but easy to believe that they won’t be quite such dominant beasts in the stock market in, say, 2030 as now. The difficult bit, of course, is identifying the sector that will take their place.
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