Is now the time to buy bank shares?

Just over two years after the collapse of Lehman Brothers, the recovery of the banks is far from complete, experts warn.

While some have heralded plans for the tighter regulation of banks under Basel III's proposed banking rules as a welcome stabiliser, other analysts say investors shouldn't get too excited.

Negotiated at an international level, the purpose of Basel III is to ensure banks hold greater capital reserves as a buffer in the event of another downturn.

"Basel III is a result for the whole sector, and the UK banks have come out of it very well because they already have fairly high capital reserves," says Julian Chillingworth, chief investment officer for Rathbones Asset Management.

"However, I'm dubious about claims that it will mean a return to paying out more dividends."

According to Chillingworth, the market is polarised on the prospects for banks: those who are bullish about economic recovery believe it will carry the banks along with it, whereas more bearish commentators think they will take far longer to recover.

In addition, some banks are faring better than others. Graham Spooner, investment adviser at the Share Centre, says Barclays is his favourite stock because it has no government funding, has decided to pay a dividend again and is being driven forward by its investment arm, Barclays Capital.

He's less convinced about Royal Bank of Scotland and Lloyds Banking Group, and says investors should only buy them if they are prepared to take a very long-term view.

Mike Trippitt, UK banks analyst at Oriel Securities advisory firm, disagrees. He sees RBS and Lloyds as domestic recovery stories and thinks there is significant value to be gained from them.

Meanwhile, he views Barclays as a hold. None of the experts expect a return to the tumult experienced in financial stocks at the height of the financial crisis, but there's no clear consensus on where they'll go next.

In the meantime, trading of bank stocks has surged 34%, according to broker TD Waterhouse, so the financial sector is definitely one to watch.

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