UK Banks: It's Not Exactly Difficult

The information provided is NOT financial advice. I am not a financial adviser, accountant or the like. This information is purely from my own due diligence and an expression of my thoughts, my opinions based on my personal experiences, and the way I transact. This information is provided for general informational purposes only and should not be considered as personal advice. Your money, your outlay, your risk. This presentation does not provide investing advice in any way shape or form. You will be solely responsible for any decisions you make. If you need to seek any advice, speak to your advisers, accountants or other professionals who you may be relying on for your wealth creation journey. Please do your own due diligence.

The Hopcraft Case in 60 Seconds:

The recent UK auto lending crackdown is a groundbreaking ruling that mandates brokers to disclose commissions from finance lenders to consumers. This decision significantly impacts several banks, notably Close Brothers and Firstrand Bank (out of South Africa), which have already paused their lending activities to navigate the legal implications. The ruling not only affects these banks more than others (Barclays, Lloyds, Santander UK) but also sets a precedent that opens the door to potential new fines and increased scrutiny for auto lenders. This move aims to enhance transparency and protect consumers from hidden costs in car finance deals.

This all stems from a Hopcraft case, which involved three claimants who argued that they were mis-sold motor finance due to undisclosed commissions paid to dealers.

The Financial Conduct Authority (FCA) initiated this crackdown due to widespread complaints about hidden, unfair commission arrangements in car finance deals. The potential fines could amount to as much as £21 billion, with findings and next steps expected to be announced by May 2025. Banks have responded by pausing their lending activities and reassessing their practices to ensure compliance with the new regulations. This crackdown represents a significant step towards increasing transparency and protecting consumers in the auto finance industry, potentially leading to a more equitable and fair lending environment.

I expect the banks to fight back. But in the meantime, I also don’t expect them to be able to be overcome the weight of it all. Government regulation sucks. And what’s worse, government fines.

To summarize, the UK government has chosen to tie a cinder block to these banks and push them into the water. CBG is impacted the most. LLOY a little.

UK Longs?

Rather than outright short, I do prefer to pair this off with someone I’ve owned for a while and that has stronger fundamentals.

Enter NWG (NatWest Group) & BARC (Barclays).

NatWest beat consensus in Q3, NII was ahead of expectations, and NIM was better than expected. They upgraded guidance for FY 2024 and manage the balance sheet well. They’re trading around 7x forwards, have a CET1 of close to 14% (dry powder for capital returns), and ability to outperform in a higher for longer environment. Not for nothing, the upgrades will likely come from the analyst community shortly. They are a pure play commercial bank.

Barclays also posted a great quarter led by Investment Banking fees. They too have close to a 14% CET1 and plan on giving back over $10b to shareholders through 2026. They’re trading at 6x forwards and like NWG should see some upgrades coming down the pike.

Thoughts:

Sometimes things are simple. Buy names like to upgrade and sell ones likely to downgrade. For me this means staying long BARC & NWG (I’ve owned both most of this year) and now adding onto that with shorts in a combination of CBG & LLOY, HSBA could also be added. CBG going to be hard to find shares I imagine and so for me it likely looks like LLOY & HSBA. HSBA is not involved int the Hopcraft, but should underperform BARC & NWG. Or to put it simpler, BARC > HSBA and NWG > LLOY.

NWG Current Estimates (these are too low):