Finance guru gloomy about UK banks

by Ed Bowsher on 09 October 2009  |  0 comments
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The UK's best investor is gloomy about our banks. That's bad news for all of us - even if you never plan to invest in the stock market.

The banking crisis is far from over.

That's the message that comes through loud and clear from an excellent interview with star fund manager, Neil Woodford. He told Citywire that the big banks 'have large embedded losses - actual losses and potential losses - the majority of which they cannot afford to recognise.'

As a result the banks don't dare to shut down some failing businesses. If the banks closed these companies, they would be forced to admit that the quality of their loan book is even worse than they currently claim.

'There is a widespread attempt to sustain businesses that in any other environment would be allowed to close...it's like what happened in Japan for so many years - the culture of zombieism.'

Depressing stuff. If Woodford is right, this means that it will be a long time before the banks are able to lend at sufficient levels to really get the economy moving again.

Should you believe him?

Woodford is a very credible commentator with an excellent track record. He steered clear of technology shares in 1999/2000 when everyone else was paying crazy prices for online companies, and in 2007 he didn't put any of his funds into bank shares whilst many investors saw the likes of Royal Bank of Scotland and Lloyds TSB as a 'core' part of their portfolios. I think he is the UK's greatest current investor. His only rival to that title is Anthony Bolton, and he is no longer managing a fund.

So yes, I think Woodford is right. It just strengthens my view that we face several years to come of anaemic growth. And that's the best case scenario. That anaemic growth could easily slip back to contraction.

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