The British banking sector has clear problems trying to meet the often contradictory needs of regulators and shareholders, but it's not the only industry facing these issues, according to Turcan Connell Asset Management Chief Investment Officer Haig Bathgate.
As regards the country's banks, a record of taking on too much risk, various bail outs and the manipulation of Libor mean that the government in future will more closely regulate an industry that's vital for the wellbeing of the economy. However, this sits uneasily with the requirements of shareholders and the extra regulatory burden may damp returns. This political and regulatory risk may make banks less attractive for some investors, and stifle the banks' ability to raise capital, an argument made by the Association of British Insurers, which said recently that there has been a"negative impact on banks' investability." For us though, the overriding issue is that is it unclear what the banks' balance sheets, which are opaque at the best of times, have in terms of bad debt.
Energy companies face a similar increased risk of tougher regulation. The economy depends on energy that's reasonably priced and the authorities may take a more stringent line on energy charges if they believe they're being manipulated higher. Like banks, this could reduce energy companies' profitability.
But regulation in itself isn't a bad thing, and given the behaviour of banks before the financial crisis, and the risk that energy companies may try and wrest too much profit from their customers, some tightening of the rules that govern these industries is probably needed.
What investors in both energy companies and banks need is more stability in regulation – not regulation decided on the hoof by politicians looking to win public approval. The uncertainty of an unstable regulatory environment would almost certainly drive investors away from both banks and energy companies as it makes them difficult to value. For banks, that's compounded by the unclear situation as regards debt.
This does not however mean that banks aren't investable. Even uncertainty has a price, and with banks trading at 0.5 times book value, compared with about 1.7 times for the FTSE 100 index as a whole, for some the upside potential may make that a worthwhile investment. After all, for those who invested in RBS a year ago the value of their holding has risen about 50%, while shares in Lloyds Banking Group have almost doubled in price.
Listen to Haig's discussion on BBC Radio's Good Morning Scotland here.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.