There's been a flurry of Initial Public Offerings (IPOs) since the start of the year which shows no sign of stopping. And it's not just technology companies, even less 'exciting' companies like Saga, which offers a range of products and services such as insurance to the over 50s, are looking to float on the stock exchange. Plus, there are a number of banks such as Virgin Money, TSB & One Savings all looking to join the floatation party. Understandably private investors are taking an interest, particularly when they see stories about other floatations where share prices jumped in the months after the initial listing (Royal Mail for example).
Last week I was asked my opinion by The Times newspaper on whether investors should buy the shares when these challenger banks float. It also raised the interesting question as to whether there could be a repeat of what happened in 2008, when big banks that complied with what we were told was solid regulation still needed bailing out. Also can the smaller 'challenger' banks make enough money to keep shareholders happy?
Should investors buy bank IPO shares
Firstly it all boils down to one thing…….the price of the shares. But are retail investors best placed to determine what is a good price for a bank share? To judge good value you'd need to know the quality of the bank's assets and how profitably a bank can use them, among other things.
Are investors any better quipped now to determine a bank's assets (and how it's making money from them) and the inherent risks than they were before 2007-08, when a lot of people had their fingers burnt?
There is no denying that bank shares on the whole are now attractive based on historic valuations and the potential for dividend distributions are increasing. And with fewer banking scandals (PPI and the like) the relative attraction is increasing. Perhaps unsurprisingly some investment fund managers who have historically been bearish on bank stocks are now dipping their toe opportunistically back into the sector, usually on share price drops (Richard Hughes at M&G is one example). But it's not all rosy, the banking sector faces a number of regulatory and legislative headwinds in the coming years from the FCA and Europe.
Can new market entrants (the challenger banks) succeed?
Possibly. But what better time is there to float a bank than when house prices are buoyant and the economy is recovering! In a fast growing economy there is large scale demand for loans which means competition is less fierce and margins are higher. But if the economic recovery falters then margins will shrink and competition will be fierce. Could a new bank's business model survive this? Could a retail investors make that judgement call? There is a tendency for investors to think that share prices only go up after floats (as seen by the rush to buy Royal Mail shares).
There is heavy dose of marketing (and market timing) with these bank floats .
Banks have to answer to their shareholders but we've yet to see if they can be 'nice and friendly' at the same time (as an aside it amazes me that ethical investment funds are often packed full of bank shares, perhaps a story for another week). And there is a huge amount of inertia (often confused with loyalty) with bank customers, with research showing most people change their spouse more often than their bank account. Smaller banks face an uphill struggle to secure significant market share.
How else can investors get exposure to bank shares
So to sum up………. if sophisticated retail investors wake up ahead of the floats thinking, 'I must add a new bank stock to my portfolio'….. then fair enough. Otherwise why put all your investment eggs into one or two baskets when instead you could buy a diversified investment fund with exposure to banking stocks (Artemis Income, for example, has around 7.9% in bank stocks via the likes of HSBC )?
(image by Francesco Marino / FreeDigitalPhotos.net)
