The Investment Column: Heat is on but don't dismiss banks

Trafficmaster's share price is looking up

The UK's big banks notched up profits of £30bn between them in 2004. This vast total meant chief executives have often been on the defensive on results day this past month, fending off suggestions they are ripping off customers and ought to cough up a windfall tax. We pay billions to the Treasury, they protest, and most of the profit is made overseas or in more obscure domestic businesses such as investment banking. The only time they looked shifty was when trying to defend the amount of time it takes to clear their customers' cheques.

The UK's big banks notched up profits of £30bn between them in 2004. This vast total meant chief executives have often been on the defensive on results day this past month, fending off suggestions they are ripping off customers and ought to cough up a windfall tax. We pay billions to the Treasury, they protest, and most of the profit is made overseas or in more obscure domestic businesses such as investment banking. The only time they looked shifty was when trying to defend the amount of time it takes to clear their customers' cheques.

The amount of political heat generated this results season adds to the risks of buying banking shares. A Gordon Brown smash-and-grab is unlikely, but profits might be worn down by the push for more customer-friendly policies. All of which comes on top of the usual competitive pressures in a dynamic retail banking market - and on top of the risk that the market for personal loans and mortgages is slowing. The stock market reacted badly to almost every results statement, despite the profits, fearful for 2005.

One oughtn't be too short-termist about the banking sector, however. With price-earnings ratios below 10 in most cases, they don't look expensive. And by reinvesting your dividends from these high-yielding stocks, total returns can be large over the long run.

Much of the sector deserves a "long-term hold" tag. Barclays was a key buy recommendation of ours in 2004, but its shares have soared. It is a solid company with a chunky dividend and takeover potential, but its shares will struggle to outperform. Last year's boost from Barclays Capital, its investment bank which specialises in bonds, may not be repeated if fixed income goes out of fashion. Royal Bank of Scotland is also now only a hold, since it is up to its financial limit after a US acquisition spree and could have a more mundane year.

The two emerging market players, HSBC and Standard Chartered, offer long-term investors exposure to the vast potential of India and China, and although the shares are valued more highly than UK-focused banks, that is fair. Standard Chartered has the best mix of assets.

Banks focusing almost solely on the UK retail market might look unenticing and are higher risk now. With house price gains likely to fade and pension fears looming larger, the consumer debt boom is coming to an end and it is important to separate the winners from the losers. Alliance & Leicester's results showed it losing market share in mortgages, and even its 6 per cent dividend isn't now enough to make up for the risks of investing in a bank with shrinking revenues. It is an outright sell. Northern Rock, despite its market share-winning muscle, looks at risk from a downturn, too, so take profits.

Lloyds TSB, though, ought to be able to offset competitive pressures by selling more financial products to its customers, and it has the benefits of a recovering life insurance business in Scottish Widows and a dividend that now appears safe. HBOS, meanwhile, is the young Turk of the sector, winning market share thanks to its positioning as a low-cost rival to the Big Four. With the promise of extra cash returns to shareholders as well as further organic growth, HBOS shares have progress still to make.

Trafficmaster's share price is looking up

Trafficmaster has 16,000 small shareholders, making it one of the most widely followed investments on the stock market, as befits one of the companies swept up in the Millennial technology boom. Like many, it invested and lost great sums building its business over that period; unlike many, it is still here and still making (albeit slower-than-expected) progress.

It makes money selling information about traffic jams across the UK's motorways and trunk roads, which it gleans from its network of sensors. It makes money selling satellite navigation systems to car drivers (or to car manufacturers who are now installing the kit as standard in 11 models) and harvesting subscriptions to its call centre-based route planning services. It makes money, too, selling vehicle-tracking systems to companies across the US, who want to keep tabs on their drivers.

Yes, Trafficmaster makes money these days. Operating profit of £2.4m in 2004, on revenues up by one-fifth.

Whether this justifies a market value of £86m at yesterday's share price of 63.5p is more difficult to gauge. There is good momentum in the US vehicle tracking business, which has 45,000 subscribers generating recurring revenue, and the salesforce is being expanded. SmartNav, the in-car navigation system, sold three times as many units in 2004 as in 2003 and such systems are fast becoming a must-have gadget.

The jury is still out on whether this system will win out against bigger electronics players in the long run, and on whether it has the legs to expand beyond the UK. But for now, things are looking up - and this volatile share is, too.