18th September 2013
Big investors have collectively snapped up 6% of the UK government’s stake in Lloyds Banking Group but five years after the collapse of Lehman Brothers, is it time for retail investors to once again look to banks to boost their own investment returns writes Philip Scott.
When the 158-year-old US banking giant Lehman Brothers filed for bankruptcy, its implosion sent global markets into chaos. In the UK, the FTSE All Share index collapsed by 35% falling from 2,757 on the Friday before the bank went bust to a post-crash low of 1,781 on 3 March 2009.
Since then banks have been through a series of bail-outs and have attempted to shore-up their balance sheets, in a bid to get their businesses back on track. The US was first off the block when it came to re-capitalising its financial system and even by March 2011, the US Federal Reserve announced its renewed confidence in the sector when it allowed leading US banks to start paying dividends again and buying back stock.
A spate of new regulations, including the so-called Dodd Frank Act and Basel III, were put in place in a bid to restore investor confidence and stop banks from taking excessive risks, such as the over-exposure Lehman’s had to the US sub-prime mortgage market.
In the UK following a painful period of write-downs and re-structuring, share prices have recovered somewhat but remain some way-off their pre-crisis highs.
However banks are very much a beneficiary of the recovering UK economy and over the past year, UK listed banks have collectively seen their shares rise by 27% according to Digital Look.
Jupiter Financial Opportunities fund manager Guy de Blonay now believes banks are largely “fit-for-purpose”. He says: “Five years on, better policing by politicians, regulators and the banks themselves have, in our view, transformed the way financial institutions go about their business.”
Fidelity MoneyBuilder Growth fund manager James Griffin believes that the UK banking industry landscape is a very different place now to what it was five years ago. He says: “We are currently witnessing its rehabilitation and a significant shift towards much more stable, cash-generative business models with a lower tolerance of risk.”
“Valuations and returns in the sector are at historically low levels. While I do not expect returns to reach pre-crisis highs, even a marginal improvement will be very rewarding for shareholders given the negative sentiment around the sector.”
But Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere believes that while banks have changed their tune and are looking and acting very differently to how they did five years ago, he asserts: “Bank shares have already enjoyed a fair run and while they have made progress in repairing their balance sheets it is very likely that they will endure further share price volatility.”
How to invest
The obvious way to gain exposure to banks is to buy individual shares. But by going down this route, investors stand the greatest chance of both making and losing money, given the concentrated risk involved in simply buying bank stocks. While small investors, as of yet at least, cannot invest in the government’s stake, since the announcement of the share sale, Lloyds Banking Group shares have already risen by around 12% and investors are free to purchase these on the open market now, ahead of any further offerings. The consensus view among stockbrokers is that these shares are a ‘strong hold’. As for the rest of the UK listed banks, the sentiment among brokers towards both Barclays and HSBC is pointing towards a ‘buy’ while Royal Bank of Scotland and Standard Chartered are a ‘hold’.
Griffin’s Fidelity Moneybuilder Growth portfolio has around 21% invested in banks and the second and third largest holdings in the fund are Lloyds and HSBC respectively. He also has investments in Barclays. On Lloyds, Griffin says: “The company has rehabilitated its balance sheet and made significant improvements operationally. It now has the largest market share in UK retail banking, and is capitalising on this strong position.
“Growth in deposit-taking, demand for mortgages and an improvement in funding markets should allow returns on equity to improve to around 13-15 per cent from around 8 per cent today.” As for HSBC, he adds: “It is one of only three truly global banks and it is unlikely we will see other global banks emerge with such a large international footprint again. In a globalising world, it should be able to make the most of these international links to make strong returns for its shareholders.”
While bank shares have generally done well, bouncing back from historic lows, investors should bear in mind that a change in sentiment could easily knock the share price of bank shares.
While there are funds available to investors that focus solely on investing in banks and financial firms, such as De Blonay’s £525m Jupiter Financial Opportunities vehicle, which has 28% of its assets invested in banks, advisers believe that in the main investors would perhaps be better off invested in a fund which has exposure to other industries too.
Connolly says: “A better option for many investors would be to simply buy a more general fund which has exposure to banks, and that way they will have a buffer of diversification.” Investors seeking out such a fund could go for a UK tracker fund, such as the HSBC FTSE 100 Tracker, he adds, which simply mirrors the rise and fall of the index, and it has some 12% exposure to banks. Connolly also points to the actively managed £2.7bn Fidelity Special Situations fund, which has 19.5% in banks. Its top two holdings are HSBC and Lloyds and Royal Bank of Scotland is in the top 10. Over the past five years it has achieved a return of 83% for its investors
Danny Cox, head of financial planning at fund brokerage Hargreaves Lansdown points to the £727m Standard Life UK Equity Unconstrained fund, which has 11% invested in banks. Managed by Ed Legget, it counts the Asian focused Standard Chartered as well as Barclays among its top 10 holdings. Over the last five years, Legget has delivered a robust return to his investors of 199%. Cox also rates the £2bn JO Hambro UK Equity Income portfolio, which has more than 8% invested in bank shares and its top holding is HSBC. The fund’s investors have enjoyed a 114% return over the past five years.