Are bank stocks the new utilities?

20th October 2014

The aftermath of the financial crisis has witnessed Britain’s banks evolve to become more like utilities, characterised by low growth and more consistent returns on capital, claims wealth manager Brewin Dolphin.

James Box, equity analyst at the firm said that as the sector is now more tightly regulated, it is likely to generate lower returns on capital than it did before the banking crisis.

He added: “Despite the broadly lower headline returns, we welcome this evolution of British banks as they begin to share some of the characteristics commonly associated with investing in utilities. This is likely to make banking a stronger and more stable sector for investment.”

Customer centric, low cost players are likely to be the long-term winners, Box suggested. “A cost advantage allows more optionality and more flexibility in pricing products. We also prefer banks that provide simple products and therefore have relatively transparent balance sheets,” he said.

In terms of what he is backing, Box favours banks with conservative management teams that are incentivised to manage for risk and return rather than growth, and is cautious about banks that have large growth aspirations.

While banks can easily grow the associated risks can take a while to transpire. He added that fines for misconduct are not necessarily being determined on the basis of a bank’s ability to pay but are based on the size and scale of the misdemeanour.

He added: “One way of avoiding legacy risks altogether is to invest in the challenger banks, some of which are in the process of seeking a stock exchange listing, such as Aldermore and Virgin.

“If banks are evolving from casinos to utilities, investing in the sector is less likely to make investors rich but rather help them stay rich.”

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