Are UK banks now a ‘buy’?

14th June 2013

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Banks are back in the news again, but this time not as the result of yet another scandal. Instead, there is the possibility that we could all become private shareholders once again writes Mindful Money contributor Chelsea Financial Services’ Darius McDermott.

Ahead of his Mansion House speech on Wednesday 19th June, when the Chancellor George Osborne is expected to announce plans to sell off the Government’s shares in Lloyds Banking Group, there are calls being made to make sure the British taxpayer, having bailed out the banks in the first place, should be able to benefit from the privatisation.

Then we get the ‘shock’ news that Stephen Hester, CEO of the Royal Bank of Scotland, is leaving the firm at the end of the year – some reports say, to pave the way for privatisation too.

Any privatisation of these banks is likely to come next year at the earliest and may well be staged over multiple years. But the news comes at an interesting time for the sector as the appeal of owning banking shares seems to be picking up amongst professional investors.

The financials sector is still the largest in most markets, with banks accounting for around 50%. So however you look at it, the sector makes a difference.

After the recent global equity rally, Guy de Blonay, manager of the Jupiter Financial Opportunities fund, believes the banking sector could be the last bastion of value available to investors. And he’s not alone.

Rob Burnett, manager of a more diverse fund, Neptune European Opportunities, is also playing the banking recovery. His fund currently has around a quarter of its assets in the sector – no small bet by anyone’s standards.

And Polar Capital are taking their conviction one step further as they are in the throws of launching a financials investment trust, which will have around 70% invested in banks at launch.

Now admittedly, the Polar Capital fund will have a low exposure to the UK to start with – they are more positive on the outlook for overseas banks. Not only are they, in the main, simpler in structure and easier to assess, but US banks, for example, are leading the way on the back of an improving housing market. And in emerging markets, banking is still a growth business, with rising numbers of people getting bank accounts and mortgages, which were, until very recently, the domain only of the rich.

Looking back at the UK, following some very hard years and much restructuring, our banks have already had a strong run, albeit from a very low base. Some have seen their prices rise more than 100% in the last 12 months, even after the recent sell-off. But valuations are still cheap. Balance sheets are much stronger and many banks now have capital levels higher than the regulations require. Importantly, when banks start paying dividends again, it could be a catalyst for a re-rating of the sector.

The attractions are becoming more obvious, but I’m sitting on the fence. There are still some huge issues for the banks to face and, given most of us hold the stocks in pension funds or ISAs already through default, I definitely don’t have enough conviction to go for a bigger bet just yet. Certainly, not all banks will be winners, so picking the right one(s) will be key.

But if the privatisations do start next year and Britain’s taxpayers do get the opportunity to participate, it may well be worth a look – if the price is right.

6 thoughts on “Are UK banks now a ‘buy’?”

  1. Anonymous says:

    Really??? All I recall in Q1 was how baaaad EMs were and we should all steer clear. The institutions sold out at exactly the wrong time in my view.

    Same for Govt bonds.

    I’m not predicting anything. The DMs are trending up but…there is much to suggest a short sharp correction a la 2011 is on the cards.

    It’s possible it’s 2008 #2 but I’m not saying it is. But need to bear in mind as a (rising) possibility.

    The $ has held multi year support and is hugely hated. Thus, likely it will have a major rally.
    …Just like EMs and USTs going into 2014.

  2. Noo 2 Economics says:

    “All I recall in Q1 was how baaaad EMs were and we should all steer clear.”

    I never said that and whilst pretty much all mainstream writers despised EM’s some didn’t and talked of buying opportunities (can’t remember who and don’t have the time to find them). I think EM’s are looking at gradually slowing to a pace commensurate with what China considers “sustainable” (probably 6% – 6.5% pa) over the next 2 years i.e. the ASEAN EM’s and commodity EM’s who are more dependent on China through trade links will slow from where they are now in tandem with China’s managed slow down, which has been well managed thus far.

    I’ve been quietly buying as imo prices are cheap even with my forecast slowdown over the next couple years as I’m looking 3+ years ahead.

    DM sharp correction? Not this side of Christmas – watch the indices as Autumn/winter unfolds (narrow money expansion says it all). As predicted here http://www.mindfulmoney.co.uk/wp/jonathan-davis/inflation-meh/ in April I maintain that UK inflation will start on the up ( I know you could argue it has already started but one swallow does not a summer make) and GDP will be respectable. The time is approaching where I will be proved right, or wrong.

    Next year will bring increasing inflation throughout the DM’s alongside another slowing cycle which will result in a correction – next year but I can’t tell which part.

    I hope you’re right about the $ rally as I have substantial holdings in $ denominations but I don’t share your bullishness due to my argument rehearsed in my post above.

    I’m also not happy about a big $ rally because of the inflationary shock that will bring to the UK which, if it happened, would exacerbate my already predicted UK inflation and could then lead to a sharp correction next year.

  3. Anonymous says:

    Yeah it’s a fact p/f mgrs were underweight EM in Q1 in historic proportions.

    Inflation? Yeah right. See my posts on how we’re #turningjapanese. Why do yiu think rates are falling?

  4. Noo 2 Economics says:

    We shall see about inflation – I remember your post re turning Japanese and disagree, in those earlier posts I argued about NARROW MONEY i.e. M1 expansion.

    Japan’s history of monetary expansion tends to favour M3 and simply increasing the monetary base without maintaining/increasing velocity as happened in Japan is unlikely to create growth/inflation. Japan’s current inflation is purely as a result of it’s currency debasement and energy policy which I note has resulted in little real GDP growth, unless Abe quickly implements structural reforms and increases velocity Japan’s GDP growth, what there is of it, will fade next year. For the UK “turning Japanese” well, we already have increasing GDP (unlike Japan from 1989 – 2012) and as I predicted in April GDP to be 2.5% – 3% – we’ll see where we are at year end.

    Not sure I correctly understand your question re “rates falling” if you mean interest rates then the only rate I follow is 10 year – 9/08/13/- 2.48% 7/08/14 – 2.51% – a bit choppy between the 2 dates but that’s speculation.

    If your talking shorter dated gilt yields (2 year, 5 year?) then they’re all up on the year unless you’re looking at very short term developments which again I say is speculation and markets mis-reading inflation direction – http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/. As I say, we shall see at year end…

  5. Anonymous says:

    LT rates have been falling for months. Hardly inflationary. OBVIOUSLY

  6. Noo 2 Economics says:

    …. and short term rates less than 1 year are up ( http://markets.ft.com/research/Markets/Bonds) which contradicts your April disinflation predictions and above statement.

    Whilst I’m on the subject of contradictory evidence, here is the obvious evidence: http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/june-2014/index.html – it looks like my prediction is coming true already, despite what the market and you think, but as I said we will see what the year end brings. Oh and whilst I’m here, your April prediction re no US inflation is wrong too – see what happens in the next 6 months.

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