Bank results to show how exposed sector is to coronavirus

Banks shares have been hammered. Smashed. Toppled.

As many of the top lenders gear up to report earnings this week, is now the time for the bold investor to buy?

First, some context to show the size of the drop. In six months shares in RBS, now NatWest Group, have halved from a not particularly inspiring in the first place 220p. Today they are gasping for breath at 113p.

It is the same at Lloyds, where soon departing chief executive Antonio Horta-Osorio has done everything but rescue the share price. They are half what they were when he joined at a sickly looking 29p.

You could buy three shares in Lloyds Banking Group for the cost of a trip to Poundstretcher.

Russ Mould at AJ Bell takes up the story: “The FTSE All-Share Banks index has hugely underperformed its global peers since global stock markets bottomed in late March, a feat it has unfortunately managed for the whole of 2020 and all of the last 12 months for good measure. The sector is the single worst performer in the FTSE since the bottom on 23 March.”

Struggling then. And the news this week is unlikely to be pretty. The FT reports today that Europe’s big banks are likely to set aside another £20 billion to deal with bad debts for the second quarter alone.

The combined figure from the big Western banks is likely to near £100 billion.

So, how brave do you feel? Two things to ponder. 1) Do you think this is the bottom in terms of economic wreckage? That things improve from here? 2) Do you think the political climate will allow banks to start paying dividends again before too long? If so, perhaps buy the shares before that becomes clear to maximise upside.

Banks are so vital to economies that they are never far from politics. NatWest, don’t forget, is still 60% owned by the government which made it slightly awkward last week when they told staff to stay at home until next year just as Boris Johnson was signalling a “back to office” message.

One reason for optimism is that banks are now much safer than they used to be.

The fallout from the financial crisis meant banks had to take on much more capital and sit on it. The old joke had it that a bank with excess capital faced only one dilemma: up which wall?

These days, a bank with excess capital is told to leave where it is, in readiness for the rainiest of days.

What we should get this week is a sense of how badly the banks feel exposed to the various Corona loans they were encouraged, or even ordered, to dish out apace without looking too closely if the recipient firms were likely to pay them back.

Certainly, it seems very difficult to make money from simple high street, retail lending when interest rates are going to stay so low for so long (in all likelihood).

In which case, diversified banks such as Barclays that have other income streams such as investment banking begin to look appealing.

Bill Blain, market strategist at Shard Capital, remains bearish.