The bank shares buying spree shows no sign of abating – with Lloyds, Barclays and Royal Bank of Scotland still the most popular stocks traded by private investors, according to TD Waterhouse, the broker.
Lloyds has emerged as a frontrunner in the bank stocks rally, following its £4bn capital raising earlier this month. Investors have been cheered by the bank’s proposed repayment of £4bn of government preference shares (funded by this last appeal to shareholders) and its decision to close 164 branches of Cheltenham & Gloucester, its mortgage arm. Enticed by the 99 per cent rise in the price of the bank’s shares in the last three months to 66p – and an attractive price/earnings ratio – many investors appear to believe that Lloyds is past the worst.
Purchasing the bank’s shares – down 83 per cent in the last three years – is still considered somewhat risky, but the bank is expected to improve its margins on lending. And as Lloyds is a large player in mortgages, it may also benefit significantly from any upturn in the housing market.
“There are still concerns that Lloyds will announce further impairments, but it is our belief that as the economy recovers many of the write-offs that the bank has made could be written back, resulting in significant profits,” points out Kristian Overend, a partner with Killik & Co, the advisory firm.
But Chris White, director of income funds at Threadneedle, is more bearish. He cites concerns about the toxic loan book inherited from HBOS and Lloyds’ high loan to deposit ratio of 175 per cent, which suggests an unhealthy reliance on wholesale funding.
“It’s not a sustainable business model on a medium-term view,” he says. “We think it will have to reduce its loan-to-deposit ratio and its reliance on wholesale funding over the next two years, which will require it to shrink its loan book or sell assets.” Low interest rates are also putting “huge pressure” on the bank’s margins for lending, he says.
The Share Centre, the broker, also reports a pick-up in the short-term trading of bank shares, but Graham Spooner, investment adviser, remains cautious on the sector’s prospects. “There’s still a lot of uncertainty out there, particularly about Lloyds. There’s no long-term visibility,” he says. “We’re neutral on banks at the moment.”
Threadneedle’s White favours investment banks such as Goldman Sachs and JPMorgan over retail banks, where margins will continue to be “hammered” until interest rates move higher. Further difficulties in the housing market and growing default rates on credit card loans as well as corporate loans also give rise to concern, according to Robin Geffen, founder of Neptune Investment Management. Geffen believes that HSBC and Standard Chartered are the most stable banks. “They are in very good shape and they will carry on paying their dividends,” he says.
White of Threadneedle is also bullish on HSBC and Standard Chartered, citing their ability to gain market share in Asia and growth in their foreign exchange business. “I’d still regard Standard Chartered as an attractive long-term investment,” he says.
“But given that HSBC looks cheaper – its price to tangible book ratio is about 1.4 times forward earnings compared with Standard’s 2.2 times – in the short-term, we’d prefer to play HSBC,” he says.
Another favourite among fund managers is Barclays, which has seen its shares rise 327 per cent to 299p on the strength of Barclays Capital, its investment banking arm.
The bank’s $13.5bn sale of Barclays Global Investors to BlackRock will also help repair its capital ratio, according to White. “If they are successful in selling BGI, it makes a rights issue less likely,” he says. Barclays says that the net gain of $8.8bn from the deal will be used to bolster its capital strength.
