Investors sell out of high street banks as diversified peers become more popular
As the banks report results Graham Spooner, investment research analyst at The Share Centre, shares his views on the sector.
“Investors who have held onto the banks hoping for a recovery have seen some reward over the last two years. However, we have long warned there is no quick fix for the sector and it has run into troubled water again recently after showing signs of recovery. We believe the short term turbulence is likely to continue with pressures from rules and regulations, strain on costs and margins, lawsuits and provisions, restructuring plans, bad debts and competition.
“It appearsmore investors have seen any recovery in the traditional banks as an opportunity to sell. Perhaps locking in some of the gains made in 2013, rather than believing this upward trend would continue. The number of investors holding Barclays over the last two years has fallen by 9%, whilst peers Lloyds and Royal Bank of Scotland have seen a decline of 12% and 29% respectively.
“There does however remain an appetite among investors for the sector and it has been the more diversified banks, HSBC and Standard Chartered, which have been the more popular picks. Standard Chartered has seen a 22% increase in the number of investors holding the share in the last two years and HSBC’s popularity is up 54%. The sector, once a favourite for income seekers, has seen much of the dividend flow taken away, however these players have continued to pay a decent yield. There is now evidence of the high street banks returning to the dividend list.
“The banks remain in the spotlight as attempts to repair reputational damage continue. Politicians and regulators have come down hard on the sector and the latest development announced this month, regarding competition in the small business banking market, has caused further uncertainty on the future of the banks.”
Spooner shares his view on the banks:
Barclays (HOLD)
Barclays’ strategic review involving more job cuts and placing more importance in the future on its commercial and retail operations has been seen as ambitious. However, investors will be pleased to hear costs should be significantly lower by 2016. We continue to recommend Barclays as a ‘hold’. The bank has underperformed significantly recently and has suffered more than its peers. If Barclays can negotiate the choppy waters it finds itself in it could offer investors some long term value. The promise of increased dividends in the future is something for long suffering investors to focus on.
Lloyds (HOLD)
Analysts continue to highlight the pressure on earnings in the medium term. However there have been some signs of improvements in recent updates and its long term restructuring plans appear to be happening faster than expected. Improved confidence in the UK housing market should also benefit the bank. Investors will be pleased to hear Lloyds will start paying a dividend again in the second half of the year and hopes to increase dividends into 2015. The shares were the best performing in the FTSE 100 in 2012 and one of the top risers in 2013. We believe the reoccurring uncertainty in the sector could limit further upside so recommend investors ‘hold’ for now.
Royal Bank of Scotland (under review in light of results on 25 July)
Management continue to make progress with long term recovery plans and the slimming down of the balance sheet. Recent results showed the bank benefit from an improving UK economy and surprised the market with a stronger first half than expected. There has been improving trends in margins, costs and bad debt charges. We have previously recommended investors avoid the stock as there are better opportunities in the sector and market. However, following the results and the bank reporting the highest pre-tax profits since 2008, we have placed the stock under review.
HSBC (BUY)
Updates from HSBC the bank this year have raised doubts over its targeted return on equity and done little to help the shares establish a support level. However, HSBC has remained a significant dividend payer and though progress may be slow, the shares could be a better option than other banks at current levels. The bank is viewed as being more conservatively managed with a superior balance sheet and deposits. We recommend HSBC as a ‘buy’ for income seekers as it aims for a progressive dividend policy. Whilst growth in the short to medium term is likely to be limited we suggest investors take advantage of the weakness in the share price and build a holding over the longer term by drip feeding into the stock.
Standard Chartered (HOLD)
The share price underperformed last year and has continued to struggle as concerns grow on the performance of emerging markets. This has led the group to lower its revenue growth targets and could also put pressure on the dividend. This is a bank that had avoided many of the pitfalls made by most of its peers. However, we recommend investors ‘hold’ for now due to rumours of unrest by institutional shareholders with regard to management performance. The company’s exposure to emerging markets makes it a geared play on any upturn in the economic situation. However, the general slowdown in Asian economies means the bank will not return to double digit earnings growth over the next two years.