Feature10 – AnalysisOfBanks
It is extremely unlikely the UK Government will allow any bank operating in the UK to fail. Moreover, the Financial Compensation Scheme guarantees £50,000 per person. However, the scheme is untried on a large scale and nobody wants his or her savings to be with a failing bank. So how do you know who to trust?
Confidence in the banks has been severely dented over recent weeks. The nationalisation of Bradford & Bingley, Lloyds TSB’s’ rescue of HBOS, and the collapse of the Icelandic banking system have made many people question how safe their money is.
Judging a bank’s reliability is difficult even for professional market watchers. However, there are a number of indicators that you should look out for.
Ratings
Ratings agencies such as Standard & Poor’s, Fitch and Moody’s assess the credit-worthiness of banks and other financial institutions, including insurance companies. The ratings are designed to let other financial institutions know how safe it is to lend money to them, but they can be used by ordinary savers to get an idea of a bank’s reliability (see table).
They are not perfect. Over the past year they have been criticised for failing to spot many bank’s dangerous exposure to toxic mortgage-related securities. But they still have huge influence. The ratings system works differently at all three agencies but they are broadly similar. At Standard & Poor’s the gradings run from AAA (the best) down to D (when a company has defaulted on its payments).
Equally fascinating are the agencies’ outlooks, which are the agencies’ opinion of the way a rating may move. Outlooks fall into three main categories: positive (may be raised), negative (may be lowered) and stable (unlikely to change).
Financial strength
Another indication of financial strength is the Tier 1 Capital ratio. This appears in annual reports and interim results and the higher it is the better. However, because it depends on market conditions it can change frequently and it is difficult for ordinary savers to find out what the latest position is.
The ratios included in the table show where the UK banks stood before the government announced its £37 billion bailout. Once that money is pumped into the system the ratios should rise. Meanwhile the figures for the foreign banks, ICICI and First Bank of Nigeria, are several months old and so shouldn’t be relied on.
Who is safe?
So, taking all of these factors together what can we conclude. The strongest banks out there are HSBC and Abbey, backed by the Spanish banking giant Banco Santander.
HSBC, in particular, looks rock solid, being one of the few big banks to have deposits worth more than its loans. (Its loan to deposit ratio is 90 per cent which means for every 90p of loans it has 100p of deposits).
Of the biggest banks HBOS and RBS Natwest look weakest. However, presuming HBOS’s takeover by Lloyds goes ahead savers should be fine.
Meanwhile, RBS is about to accept £20 billion in Government assistance and hand over 63 per cent of its shares in the process. After taking such a big stake the Government is not going to let it go under.
| Bank | Credit rating | Outlook | Tier1Capital ratio |
| Banco Santander (Abbey, Alliance & Leicester) | AA | Stable | 9.25% |
| Barclays | AA Watch | Negative | 7.9% |
| HBOS | A+ Watch | Positive | 7.3% |
| HSBC | AA | Stable | 8.8% |
| Lloyds TSB | AA Watch | Negative | 8.6% |
| RBS (Natwest) | A+ | Stable | 6.7% |
| Nationwide building society | A+ | Stable | 9.7% |
| Post Office (Bank of Ireland) | A+ | Stable | 8.1% |
| ING | AA | Stable | 8%** |
| First Bank of Nigeria | BB | -Stable | 17.4% |
| ICICI | BBB | -* Stable | 11.29% |
Source: Standard & Poor’s/company accounts
*Fitch rating
**Tier 1 Capital Ratio following the €10 billion cash injection by the Dutch Government
(from Money Central, The Times, October 17, 2008)
