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The bottom line on banks

Investors exposed to the UK banking sector are bearing the brunt of the financial crisis.

Look at the current share prices compared with 12 months ago to reveal the damage that has been done – Lloyds TSB down by 59 per cent, Barclays down by 60 per cent, Royal Bank of Scotland down 81 per cent and HBOS down by 83 per cent, as of October 9.

These falls have been felt across a whole range of investments, including mutual funds and structured products, with returns on many equity income, financials and special situations funds taking a big hit.

But in the past few weeks, commentators have high-lighted issues they believe could indicate the bottom of the market, namely the plan-ned merger of Lloyds TSB and HBOS and the Government’s bailout plans.

The bailout is designed to rejuvenate the financial and banking system, with 200bn available through a special liquidity scheme, the Government offering 50bn through buying shares and a guarantee of 250bn to encourage interbank lending. On Monday this week, the Government revealed that 37bn is to be injected into Royal Bank of Scotland, Lloyds TSB and HBOS.

PSigma income manager Bill Mott has held a contrar- ian style on banks, believing that, barring financial Armageddon, cyclical stocks and economically sensitive stocks in general benefit the most when the market bounces back.

Mott currently holds just over 10 per cent of banking stocks in his portfolio through a number of the main players such as HSBC, Royal Bank of Scotland and HBOS.

He says: “The banking sector has changed for a generation as banks become more prudent when it comes to lending. We may even go back to the days when you had to have an interview with a bank manager for a loan.

“There are opportunities in the right banks as consolidation in the market will result in mega-banks that will have great prospects and look attractive from an investor’s perspective.”

Others are buying into the “opportunity”. Fidelity UK special situations man- ager Sanjeev Shah recently moved to overweight financials, with part of the move coming through UK banks.

He says: “The move in banks has been through repositioning in firms like HSBC as well as recently adding to more controversial names like Lloyds, HBOS and Barclays. Overall in financials, I am now 700 to 800 basis points overweight.”

Jupiter financial oppor-tunities fund manager Philip Gibbs says attempts to prop up the banking sector do not eliminate all the risks to the market.

“I see no reason to alter the cautious stance I have been taking in my portfolio and continue to favour government bonds, where yields have the potential to narrow further, rather than shares. I also believe we can expect a fall in sterling.”

M&G corporate bond fund and optimal income fund manager Richard Woolnough says it is hard to judge any potential opportunity, given the volatility seen by banks’ share prices on a day-to-day basis.

“I have been reducing my exposure to the financials throughout the credit crunch and am now significantly underweight. The share price has also been driven down in the past couple of months as there continues to be a flight to quality.

“Markets are continuing to weaken but until there is either exceptional value or a tipping point I will not make a move. I do not believe we have seen those yet, though the Bank of England has attempted measures to achieve that through the 0.5 per cent interest rate cut.”

Hargreaves Lansdown investment manager Ben Yearsley believes that it would undoubtedly be a gamble to move in at this stage.

He says the biggest part of the deal is the initial 25bn of funding offered as recapitalisation to the banks and how it would dilute the existing shareholders’ contribution.

“Even if it does dilute, the upside is pretty vast. How- ever, there remains so much uncertainty as to how the plan will work. The upside is the guarantee to encourage lending between banks.”

Yearsley believes advisers and investors should trust managers to assess the risk rather than looking at what they hold and making their own judgement calls.

He says: “Equity income is probably the sector where the opportunities will come for the typical investor but not all will dive into the banks.

“It all depends on the details of the plan. For example, if RBS were to get 5bn in preference shares and had to pay 7 per cent it would be a good deal and would see shares rise, whereas paying 20 per cent preference shares would likely result in the share price falling.”

Informed Choice director Martin Bamford says: “The bottom line is that there is so much uncertainty and toxic stuff in the banking sector, meaning that many more can collapse. Good long-term value is there but there are so many risks that you could lose all your investment, so for banking stocks the answer is no.”More investment news and analysis at: www.moneymarketing.


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