This Sunday marks the fifth anniversary of the demise of Lehman Brothers, an event which sparked the worst global recession in decades.

When Lehman filed for bankruptcy on Monday 15 September 2008, markets were sent into a precipitous downward spiral, with indices such as the FTSE All Share tumbling from 2,757 on the Friday before the bank went bust to a post-crash low of 1,781 on 3 March 2009.

In one day, the “too big to fail” theory was shattered and the interconnectedness of financial markets was dramatically laid bare.

Unsurprisingly, the banking sector was one of the worst affected by Lehmans’ collapse. Banks’ share prices tanked and many institutions had to be bailed out by the state.

Since the crash, however, banks – UK institutions included – have undergone a period of deep rehabilitation, including painful write-downs, boardroom turmoil and perhaps even cultural change.

Sweeping changes to the way banks are regulated have also ensued.

The result has been stronger capital bases, de-levered balance sheets and recovering share prices.

Against this backdrop some investors are beginning to reappraise UK banks. Among them is James Griffin, portfolio manager of the Fidelity MoneyBuilder Growth fund.

“We believe that the UK banking industry is a fundamentally different place now from before the trauma of the financial crisis,” Griffin says.

“We are currently witnessing its rehabilitation and a significant shift toward much more stable, cash-generative business models with a lower tolerance of risk.”

He is encouraged by the fact that valuations and returns in the sector are at historically low levels.

“While I do not expect returns to reach pre-crisis highs, even a marginal improvement will be very rewarding for shareholders given the negative sentiment around the sector,” he says.

Griffin is investing in part-nationalised Lloyds Banking Group, which he believes is in a strong position following its HBOS acquisition in 2009.

He says: “The company has rehabilitated its balance sheet and made significant improvements operationally. It now has the largest market share in UK retail banking, and is capitalising on this strong position. Growth in deposit-taking, demand for mortgages and an improvement in funding markets should allow returns on equity to improve around 13%-15% from around 8% today.”

He also likes HSBC Holdings, which he says, has a “uniquely strong position” as one of only three truly global banks.

Meanwhile, Ian McVeigh, manager of the Jupiter UK Growth fund, has been investing in banks as a way of participating in the UK recovery.

More than half of the portfolio is invested in sectors predominantly exposed to the UK domestic economy: banks, retailers, housebuilders and domestic media companies like ITV and TalkTalk.

“This has, at times, been a lonely position, as investors continued to flock to emerging markets in the search for growth,” McVeigh says.

“But it is our shift away from these which has produced excellent returns for our investors in recent years.”

The fund has delivered top quartile performance over 1, 3, 5 and 10 years.

Lloyds Banking Group is the largest holding in the fund. “We believe the government could be on the verge of selling its stake in stages in such a way that taxpayers make a profit on their original investment,” the manager says.

Elsewhere, Chris White, manager of the Premier Monthly Income and Premier Income funds, has been investing in banks as a geared play on the UK economy.

He says UK banks “feel a bit safer” than their European counterparts: “[UK banks] have confessed. They are further down the road of sorting out their problem assets because the crisis for them was more acute.”

He believes financials as a whole are an interesting asset class “screaming value”; he has an overweight position in HSBC and also owns Standard Chartered, two companies he refers to as “quality stories” thanks to their exposure to emerging markets. Despite the recent slowdown in emerging markets, he believes on a long-term view, these banks will succeed.

White does, however, caveat his optimism with a warning. “Five years down the line and we are still uncovering problems at banks. Only this year Barclays has been accused of manipulating the energy markets. Then there is the Libor and PPI [scandals].

“It will be a long road back to health but we are slowly getting there.”

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