When millions of small savers in building societies collected 'free' cash from a series of flotations during the 1990s, their main worry as shareholders seemed the risk of dying of boredom.
By Jeremy Gates
When millions of small savers in building societies collected 'free' cash from a series of flotations during the 1990s, their main worry as shareholders seemed the risk of dying of boredom.
A decade or so ago, bank shares paid solid dividends - about 2-3% a year - and moved little in value, either up or down. But those who put 'windfall' shares in the drawer (and even bought more) know differently today.
This week, over 850,000 small investors at Bradford & Bingley (B&B) saw the value of their holdings plunge hundreds of pounds in a day - to a fifth of their value a couple of years back.
B&B shares, worth £5.21 each in March 2006, have changed hands for barely £1 in recent days.
Even holders of 250 B&B shares, the minimum allocated in its flotation, face a call for another £131.20 to pay for their entitlement of 160 new shares in the £300m rights issue needed to support the bank's battered balance sheet.
Northern Rock shareholders have already been sunk. Halifax Bank of Scotland (HBOS) shares, worth £11.55 each barely 16 months ago, hover nervously around the £4.50 mark, pending another rights issue.
Alliance & Leicester (A&L), also enfeebled by the credit crunch and its reliance on the money markets, has fallen from a peak of £12.36 to little over £4. City analysts fear a possible rights issue there too before long.
So are building societies and banks a lost cause for small investors - or is this the very moment to back them?
Legendary stock picker Anthony Bolton, famous for his stewardship of Fidelity's Special Situations Fund, has suggested this may be a good time to buy bank shares, on the assumption they are at the end of their problems.
City wisdom says banks only launch rights issues when all their problems are in the public domain. If they have them any earlier, there is a chance they will need second and third rights issues - a disaster for their bosses.
Small investors may have taken the message on board: according to execution-only broker T D Waterhouse, the list of top 10 shares chosen by small investors this week (May 21) is headed by Royal Bank of Scotland (RBS), Barclays, Lloyds TSB and B&B - with HBOS in at seventh place and A&L at number 10.
Obviously, it's a risky strategy in uncertain times.
Says Nick Raynor, investment advisor at The Share Centre, which has more than 100,000 clients: "Bank shares pay good yields, but their value has been falling by a larger amount. Barclays was paying 7% two weeks ago at £4.50, and now it's down to £3.80.
"Banks have already plunged through the levels we predicted, and we see further weakness in the sector.
"We don't rule other possible rights issues, from Barclays and A&L - and possibly even a second rights issue from Royal Bank of Scotland, which would really set the cat among the pigeons, if it fails to raise cash by selling off assets."
Despite this, Raynor understands why some small investors remain keen on bank shares.
"They see banks have made bucketfuls of money over the past 25 years, and continue to do so away from mortgages. We don't think any other bank will actually fail - and in six months' time, there is scope for takeovers if prices remain at current low levels.
"Bradford & Bingley is worth only £650m, against £2.5bn just a year ago."
Says Richard Hunter at discount broker Hargreaves Lansdown: "It's important to remember Northern Rock didn't actually go bust. Its life was cut short by a massive liquidity problem, after it had adopted a particularly aggressive business model."
However, Hunter thinks that putting fresh money into B&B shares now is a bit like putting £10 under the mattress: "It might still be there in four years' time, but your money would have done better elsewhere."
Hunter says the acid test for investors facing a rights issue cash call is to ask: "With a spare £1,000, would I invest it in B&B or HBOS? If not, don't take the rights. The market consensus is that both B&B and A&L are not far from being outright sells.
"I see better value with a bank like Standard Chartered, with its limited exposure to US sub-prime debts and its strong links to the Tiger economies of Asia."
Says Graham Neale at Killik & Co: "The problem is that many small investors have portfolios heavily dominated by demutualisations, possibly including HBOS, A&L, B&B and Northern Rock.
"On small holdings, it can often make sense to take up the rights allocation to avoid the cost of paying a broker to sell nil paid rights in the market. Holdings might be so small that it is easier and cheaper to accept more shares.
"On a long-term view, we are underweight on the clearing banks because we think investors will get better exposure to the financial sector from companies like ICAP, Close Brothers, Man Group and Prudential."
Small investors can sell all or parts of their rights issue shares. By 'tail swallowing', they can sell some - to raise the cash to pay for the remainder - without having to stump up new money.
For what it's worth, my family has small holdings in both B&B and HBOS - and we will take up the rights on both.
Partly I am influenced by their strength in the Buy to Let sector, where doomsters have long predicted trouble if property prices start to fall.
If bricks and mortar can replace poorly-performing pensions for many in the private sector, Buy-to-Let could be more resilient than some expect.
INFORMATION: The Share Centre (01296 414 141); Hargreaves Lansdown (0117 980 9800); TD Waterhouse (0845 607 6001) has trading rates from £9.95; Killik & Co (0207 337 0520).
Norwich & Peterborough BS (N&P) offers commission-free share dealing in June and July for customers opening a new nominee sharing dealing account during those months. Enquiries: 0151 242 3571 and www.npbs.co.uk/sharedealing
POUNDNOTES
:: Savers with National Savings & Investments (NS&I) may have been alarmed in recent months to see returns on their money plunge in line with falling Bank base rates.
Now NS&I is trying to repair the damage by lifting rates on fixed rate investments by up to 0.50%, benefiting new investments only in Fixed Interest Savings Certificates, Index-linked Savings Certificates, Children's Bonus Bonds, Guaranteed Income Bonds and Guaranteed Growth Bonds.
NS&I has also issued its 15th Guaranteed Equity Bond (GEB), on sale until July 1, to offer a gross return to match any FTSE 100 Index growth, up to a maximum return of 75% over the five-year term of the bond, without any risk to the original sum invested.
If FTSE rose 20% over the five year term, £10,000 invested would be worth £12,000 on maturity. Minimum investment is £1,000.
Enquiries: 0500 500 000 and www.nsandi.com.
:: Heading off to Europe for some sun over the Whitsun holiday? Prepaid currency card provider FairFX.com claims holidaymakers could be hit by a weak Pound against the Euro and "extortionate" airport currency charges, with those leaving Luton, Newcastle, Liverpool, Leeds and City airports likely to be paying well over the odds for holiday cash.
Prepaid currency cards work like a debit card, but can be topped up via the internet or by text. The FairFX currency card offers rates for Euros and US dollars at less than a 1% margin above wholesale rates - and promises all users the benefit of 'business' level foreign exchange rates.
:: Online and telephone bank first direct, which stopped offering mortgages to new customers on April 1 after receiving five times its normal level of applications, is back in the market, with loans available to new and existing customers including a two-year fix at 5.76%, with £499 booking fee and £1,499 arrangement fee, a five-year fix at 5.98% (£299 and £299 respectively) and a 10-year fix at 5.99% (also £299 and £299).
Enquiries: 0800 244824/www.firstdirect.com
:: Increasing numbers of people who find that pay day no longer brings relief from debt worries are turning to expert professional help, says comparison site IVA.com.
The website has already highlighted a sharp rise in the number of professional people - including company directors, accountants and investment bankers - seeking help with ballooning debt problems. It says some people are £100,000 in the red.
Terry Balfour at IVA.com says that IVAs approved by debtors and creditors are not always the best answer to financial problems, and that a better solution might be bankruptcy or a debt management plan.
There are nearly 1000 providers of IVAs on the IVA.com database and the service is designed to allow clients to meet an insolvency practitioner face-to-face in their own area.
Enquiries: 01273 863 241/www.iva.com
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
FirstSave www.firstsave.co.uk 7.10% (F) Fixed Rate Bond One Year Bond £1,000 On maturity
Heritable Bank 0845 607 1212 6.50% 60 Day Notice Issue 1 60 Days (B) £1,000 Yly
Abbey www.abbey.com 6.50% Instant Access Saver Instant £1,000 Yly
Birmingham Midshires 0845 603 2286 6.35% Guaranteed Reward None (T) £1 Yly
Kaupthing Edge www.kaupthing-edge.co.uk 6.31% None £1,000 Mly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 5.43% (FTB) for two years 90% £999 Yes
Principality BS 0845 045 0006 5.58% to 30/06/18 75% £999 Yes
Mansfield BS 01623 676345 5.65% for three years 75% £599 Yes
Skipton BS 0800 446776 5.79% to 30/06/10 95% £799 Yes
Post Office 0800 707 6204 5.89% to 31/05/11 95% £599 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
Source: Money£acts (01603 476 476)
All rates subject to change without notice
