Sector spotlight: the outlook for investing in banks

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Written by:
10/08/2015
Investors deserted UK banks following the financial crisis but with share prices recovering, dividend payments resuming, and institutions seemingly in stronger regulatory shape, is it time to revisit the sector?

While negative headlines persist, the banking sector is an investment consideration for an increasing number. Graham Spooner, investment research analyst at The Share Centre, notes much of this interest comes from newer investors.

“Those who got their fingers burnt by the crash, perhaps understandably, have been more reticent to dip their toes in the industry again,” he says.

“But sentiment has started turned positive for the first time in a long time. Signs of life are there again.”

David Battersby, investment manager at Redmanye-Bentley, is bullish moving forward.

“Love them or hate them, you can’t do without them – and they’re not going anywhere,” he says.

Others, however, continue to view banks with suspicion. Colin Morton, lead manager of the Franklin UK Equity Income fund, is one of them.

“No one should doubt the banks are behaving more sensibly than they were. However, they’re still relatively opaque in their conduct, and caution is advised when considering the sector. It’s not the reliable safe haven for income it once was,” he says.

While the sector overall may divide opinion, what of individual stocks?

HSBC

This year, HSBC has faced criminal charges in a number of countries, been accused of helping clients the world over evade tax, steadily reduced staff numbers and downsized overseas operations.

However, some remain optimistic. Morton believes HSBC is a stable and reliable holding.

“In its recent results, profits grew by 10 per cent, and the bank made a commitment to further cuts, which should be welcomed by investors,” he says.

Despite scaling back, Keith Bowman of Hargreaves Lansdown notes HSBC remains the world’s only legitimately global bank, with a strong presence in Asia – “a long-term growth market”.

“At the moment, most banks are taking a ‘stick to what they’re good at’ approach, focusing on consumer services,” he says.

“HSBC meanwhile still has a strong investment arm, among other offerings, which may put them ahead of the opposition.”

Battersby believes HSBC is attractive due to its high dividend yield – it currently yields just over 5%. Spooner recommends HSBC as a ‘buy’ for low- to medium-risk investors geared towards income.

This year has, however, been rife with speculation HSBC may move its headquarters away from the UK to Asia, inducing apprehension in some – but Battersby believes investors have nothing to fear, irrespective of the outcome.

“If HSBC were to relocate elsewhere, don’t think for a second the bank would leave the London Stock Exchange,” he explains.

“It doesn’t matter where they’re based or registered – the listing will remain. Regard any speculation it won’t as froth.”

Lloyds

In March this year, Lloyds announced plans to resume its dividend pay-outs. While shareholders can expect just 0.75p per share, the news provoked immediate excitement. Spooner detects a more positive attitude towards Lloyds, and Bowman notes increasing interest in the bank.

“When the dividend resumption was announced, we saw a marked rise in client enquiries and trading activity,” he says.

“This picked up significantly after the pension freedoms came into effect in April. People are looking to Lloyds as a source of income in years to come.”

Lloyds has also dominated headlines recently due to its ever-growing Payment Protection Insurance (PPI) misselling bill, which currently stands at over £13bn. Indications are this will only increase, suggesting problems may not be over. Battersby responds that PPI liabilities are now factored into the Lloyds share price, and markets are looking to the future.

“Investors look two years down the line and see a thriving bank that has significantly increased pay-outs,” he explains.

If the UK recovery continues, Lloyds may be well-positioned to benefit, due to its domestic focus and sizeable customer base (it currently has around 30 million clients).

However, Morton believes Lloyds may not represent such a golden opportunity.

“Lloyds presents challenges from an investment perspective, particularly given its heavy involvement in the UK mortgage market,” he explains.

“Currently bad debts are at all-time lows – in fact, they’ve almost never been as low as they are this year. The worry is this is as good as it gets for them, especially with interest rates potentially close to rising.”

RBS

Government-backed RBS has posted significant losses every year since the financial crisis, culminating with a £3.5bn loss in 2014. It has faced sizeable penalties for wrongdoing (including forex rigging and PPI misselling), with more payments to come.

The bank is scheduled to be sold off in pieces. On 4 August, £2.1bn RBS shares were swiftly sold to institutional investors. Sales to retail investors are expected follow. Bowman believes RBS could be a dividend payer in future, and many will want to “get involved early, and cheaply”.

“The bank’s not completely out of the woods, but Natwest is doing well and earning high returns on equity. We are increasingly warming to the story.”

However, resumed payments are a matter of speculation, and Battersby believes the bank will not regain its former standing until it is wholly privately owned – a prospect still some way off.

Before then, the bank also faces a multi-billion settlement in the US over the sale of mortgage backed securities

“The dash by institutional investors to get a slice of RBS suggests confidence in the bank has improved – nonetheless, we remain cautious,” says Spooner.

Standard Chartered

Until 2013, Standard Chartered appeared immune from the issues that blighted the banking sector overall, maintaining record profitability during the crisis. However, last year its profits fell by 30 per cent. On 5 August 2015, the bank’s results for the six months ending June pointed to a 44 per cent fall in pre-tax profits year-on-year.

As a result, new chief executive Bill Winters has moved to shake up the bank’s management and organisational structure – and halved dividend payments.

“Problems have finally caught up with the bank, and while restructuring is in process, it’s early days yet and serious legacy issues remain,” says Spooner.

While the bank’s sizeable exposure to Asia may be attractive to some, Bowman notes emerging market exposure isn’t the attribute it once was.

“The problems are plain to see. There is a turn-around plan in the making, and Winters makes a good case for the future, but there could be a fair wait to see the rewards for his actions.”

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