M&G corporate bond fund manager Richard Woolnough believes the business model of banks is under threat.
Woolnough, who has been bearish on banks, says he will remain underweight on financials and warns that more writedowns are on the way. He says: “Banks rely on borrowing at one rate, lending at a higher rate and making a profit. But if corporates can borrow more cheaply by issuing bonds to the market, then why should they go to the banks to borrow money?”
Woolnough say banks can only make money at present by lending to higher-risk borrowers, a sector they want to avoid.
He says: “Banks are desperate to borrow from the market, and a whole stream of banks have been trying to issue bonds whenever there is a short-term rally in risky assets. Continuing heavy issuance will put further pressure on bank bonds. There is a point when they become attractive. Once the majority of this emergency issuance is done, we think there could be some excellent opportunities towards the end of the year.”