As reported in the Financial Times, the UK Government has capitalised on a recent rally in Lloyds shares to sell down its stake to below 20%, while George Osborne is also said to be considering selling RBS shares. This is even if the taxpayer makes a loss on the troubled bank which, alongside Barclays, has been hit by enormous fines for rigging foreign exchange markets.
Six years on from the nadir of the global financial crisis, and with HSBC mulling over a move of its headquarters away from London, have we really seen any flag in headwinds for UK financials?
Certainly, on one level boards will be pleased with a Conservative majority – higher banking levies were threatened by Labour which was, perhaps unfairly, has been painted as unfriendly to the City.
“Lloyds does now look quite attractive; it can reinvest to grow the business and I expect its dividends to grow,” says Simon Brazier, manager of Investec’s UK Alpha and UK Equity funds.
“George Osborne has made it clear that the Government is planning to sell out its stakes in the likes of RBS. And, because they would be selling these stakes to the populous, I can’t see them then instituting major policy designed to hurt them. So, I would expect a relatively more benign environment for financials going forward.”
Henry Dixon, manager of GLG UK Income fund shares a similar view, believing that the banks were the “real winners” in last week’s election.
He explains: “You can’t underestimate the confidence banks will be feeling now in terms of their futures, and this could be an inflection point for them, potentially drawing a line under PPI claims, bringing an end to the fine culture, and creating a more constructive outlook generally.”
However, many investors continue to underweight the sector for fear of an ongoing lack of transparency. For example, Jeremy Lang, manager of Ardevora’s UK Income and Global Equity funds, does not hold any banks believing it is still too hard for investors to understand what the real risks are because of activities carried out of balance sheet.
“You are in an environment with an intrinsically unfriendly regulator, regardless of which country you look at,” he adds.
“I take the simplistic view that any benefits of restructuring and more sensible management behaviour is not going to stick to me, and will effectively be syphoned off by the regulator by making banks be more prudent, restricting what they can do and generally clipping their ability to make profits.”
Also looking from a broader scale is Nicolas Walewski, founder at European equities boutique Alken Asset Management. While underweight the sector, he says he has been “warming up” to the banks on the view that the credit cycle is turning more favourable. He has thus bought into Spanish banks Banco Popular and BBVA.
“As consumers have more money and companies are full of cash, lending activity should improve and the banks will re-rate,” he adds.
“Slowly earnings will go up – the sector has been weak for years, but should now begin to perform.”
Last word goes to Alan Higgins, CIO at Coutts, UK, who is bullish on financials in the US, Europe and Japan. Coutts multi-asset funds invest directly into JP Morgan, Morgan Stanley, Mitsubishi, Sumitomo Mitsui and Mizuho.
“The global economy is recovering and low unemployment is good for the consumer, and there is great value in financials at present with relatively low price-to-books in all three markets,” he says.
Most importantly, he points to credit growth in these geographies, which gives them an advantage over the UK.
“In the UK there is great value, and a strong economy, but no credit growth – but in the words of Meatloaf, two out of three aint bad!”
