“HSBC and Citigroup are more diversified and complicated businesses [than Lloyds and BoI], but that diversification gives them downside protection,” Wright expanded. “Barclays is early in its restructuring story; there is still a lot of work to do in shrinking the investment bank and raising returns, but the valuation reflects that and it is trading below tangible book.
“The position in Barclays is probably the riskiest of my bank holdings, because the analysability of the investment bank is much tougher than the retail side and it is early in the turnaround process. That said, it is trading on about one-times price-to-book, whereas Lloyds is priced at six-times price-to-book, so Barclays at a significant discount to the rest of the sector.”
While certain challenger banks may carry attractive valuations at present, Wright believes the sector is too much of an oligopoly to yield positive returns in the long-run for these so-called ‘industry underdogs’.
“I have never owned any of the challenger banks,” he said. “Banking is a scale game and the big banks have very sticky customer bases, so challenger banks have to offer very attractive rates to get those customers, or go to less-sticky areas such as buy-to-let mortgages or low-credit.
“But while you may be able to make decent profits in the short-term, ultimately those businesses are more risky and in the next downturn it will be where we see the most problems.”
