Are UK banks now a ‘buy’?

14th June 2013 by Darius McDermott

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.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *