After numerous scandals and fines, the badly bruised UK banking sector has seen a recent upturn in share prices.
Shares in the major banks have shot up over the past six months, with Barclays up 79 per cent, Lloyds Banking Group up 61.8 per cent, Royal Bank of Scotland up 28.8 per cent and HSBC up 26.8 per cent.
Banks have been the second best-performing sector in the FTSE All-Share Index over the past year, up 38 per cent compared with 16 per cent for the index as a whole.
This upturn might imply there is little room for value in the banking sector, with now being the time to take profit and sell stocks. However, fund managers are still finding plenty of value in the UK financials sector while some are looking further afield to Europe for cheap valuations.
Jupiter Asset Management UK fund managers Ben Whitmore and Ian McVeigh spoke at the Jupiter investment dinner in London on 13 February about the opportunities to be found in bank shares. They noted that some are as low as half-value and showing signs of rising.
McVeigh’s £827.4m Jupiter UK growth fund has Lloyds Banking Group, Barclays and RBS in its top 10 holdings while Whitmore’s £970m Jupiter UK Special Situations fund holds RBS.
Speaking to Money Marketing last week, McVeigh said: “Clearly, banks are less attractive than was the case at the start of 2012 as prices have risen substantially since then. However, they still trade at around 70 per cent of a book value that has been heavily written down and are, therefore, more conservatively cast than they were going into the downturn when investors were prepared to pay two or three times book value.”
Bestinvest director Jason Hollands says banks are increasingly finding favour with fund managers as the risks associated with investing in them have fallen.
Hollands says: “Mainstream banks have started to interest fund managers again, largely because they are becoming less risky – having scaled back their exposure to racier activities such as proprietary trading and merger and acquisition deal-making – and are refocusing on core banking services. As they become more stable businesses with stronger capital ratios, this should improve dividend prospects.
“However, one caveat to this improving scenario is a move to negative interest rates, an idea being floated by some at the Bank of England, which could slow this healing process by pushing banks to increase lending.”
Invesco Perpetual fund manager Jeffrey Taylor, who runs the £1.1bn European Equity fund, argues there is a “broader range” of opportunities to be found in the financials sector in Europe than there is in the UK market.
Taylor says he is interested in a number of European banks, but admits that others he “would not touch with a bargepole”.
He says: “There are some European banks where the level of recapitalisation that has happened is clearly already adequate and where enough progress has been made in dealing with the provisioning of bad debts, to be able to glimpse what it looks like on the other side.
“If you can combine decent capital with progress on provisioning and an interesting valuation, there are a number of stocks where I do think it is right to be involved.”
Taylor says he finds opportunities in European insurance stocks, which have been left largely unaffected by the euro crisis, making them a less risky investment.
He says: “You will find that a large chunk of my exposure to financials is in insurance stocks – some of the obvious big names in Europe. These are typically businesses where you have high levels of solvency capital and where the business model has never been broken throughout the financial crisis.”
The Invesco Perpetual European Equity fund has its largest sector allocation in financials at 29 per cent.
Old Mutual fund manager Kevin Lilley runs the £59m European Equity (ex-UK) fund, in which financials is the top sector at 26 per cent. Lilley holds Credit Suisse, BNP Paribas and Spanish bank Banco Bilbao as part of the fund’s top 10 holdings.
Lilley says he was recently overweight banks, but has just taken his exposure back down to neutral in the hope of riding out any potential impact from the Italian general election. He plans to buy back the banks he sold following the election.
Lilley says: “European banks have done exceptionally well but as they are viewed as a risk asset I chose to bring banks down to neutral when it looked like the Italian election would become a close call.
“The election was putting pressure on Italian banks and banks in general, bringing an element of risk back into Europe.”
Highclere financial partner Alan Lakey says banks will emerge from the recent scandals in the sector and return to “making massive profits”, bringing good value for shareholders.
He says: “The financial sector in the UK and Europe has been devastated in the past few years with share prices tumbling. Once the unknown debt that has accumulated from the Libor and PPI scandals has gone, bank shares will rise above that of your typical FTSE share.”