Banks & Public Debt
I was chatting with a friend the other day who noted that we own a great deal of the banking sector and that these banks were once perceived as very valuable. Surely, he argued, that time will come again and we can sell our stakes at a profit to pay down a big chunk of the national debt?
Whilst I accept that the bank stakes will be sold on at some point, and we might make a decent profit (as Sweden did in the 1990s), I suspect we shouldn’t hope for too much.
The chart below is RBS (70% government owned and currently valued around £24.5bn).
The shares currently trade around the 44p mark, up some 266% since they hit 12p a couple of months back but still down around 95% from the peak of 590p.
So what if the government can sell our stake back to the market at 590p? That would imply a valuation around £300bn so our 70% holding would be worth a huge £210bn. A lot of money certainly.
But one we are sadly unlikely to realise.
We have experienced a credit bubble over the last two decades and, in a world with less credit, less fancy structured profits, less securitisation and more regulation it is unlikely that bank profits will ever be as high again. All of this implies a lower valuation in the future.
When bubbles burst things get messy. Here’s Yahoo:
Even though it rose by over 800% from its low, it was still 60% below its bubble valuation peak. And here’s BT (also caught up in the dot.com/TMT bubble):
It rose over 100% from its low but was still some 70% below peak.
So, whilst we may make a profit on our bank stakes it is unlikely to be a huge amount. It will also be important not to sell them too early, it could take years before they are valued appropriately.
Equally of the above is premised on the idea that we definitely want to sell them all. I suspect we will eventually but it’s a debate we shouldn’t be so quick to close down.