Fund managers are banking on a change in fortune for financial services firms as the largest lenders and insurers start to reintroduce dividend payments.
Shares in the five biggest UK banks are all well below the value of the assets that they own, meaning that investors can pick them up on the cheap.
Good recent profit figures from banks suggest that they may be poised to bounce back from a tough 2020. At Lloyds, Standard Chartered and HSBC profits recently doubled, while NatWest returned to profit having registered a loss last year.
Dividend payments have also been restored after banks were barred from returning cash to shareholders by the Prudential Regulation Authority (PRA), the financial services regulator, last year. Share buybacks in the region of £1.5 billion have also been promised.
Rob Burgeman from the wealth manager Brewin Dolphin said that the return of dividends and the easing of lockdowns put UK financial services companies at a turning point.
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He said they had been remarkably resilient throughout the coronavirus pandemic. “Uplifts to interest rates to combat inflation will go some way towards helping them,” he said. “While we are not predicting a return to rates anywhere near the 3 per cent to 5 per cent prior to the financial crisis any time soon, even some increase gives scope for greater profitability.”
Callum Abbot, the manager of the JP Morgan Claverhouse investment trustsaid that 2020 had acted as “a pretty good stress test” that banks had navigated well. He said he preferred the UK-focused banks such as Barclays and NatWest to those that sell more into Asia such as HSBC and Standard Chartered. “We feel that the UK domestic economy is in good health,” he said.
“We’re less confident on some emerging markets and we feel HSBC is between a rock and a hard place in Hong Kong.”
Burgeman thinks Barclays is the best-placed UK bank because it has operations outside of the UK and a range of divisions other than just retail banking. Its investment management business in particular did well last year while retail banks struggled.
Outside of the banks, Burgeman likes Legal & General, which has insurance, investments and savings divisions. Burgeman said that the firm had a market cap of just £16 billion, which compares to its German rival Allianz at £86 billion and French counterpart AXA at £52 billion. That could make it a bid target for an overseas insurer.
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Burgeman said that in the US the investment platform Charles Schwab had “benefited from the influx of retail investors in the pandemic”, while the asset manager BlackRock was flying high from a greater adoption of passive funds.