United Kingdom

INVESTMENT EXTRA: Can investing in banks make you a tuppence or two? 

Bankers are rarely popular, attracting scorn and envy in equal measure. But lately, bank shares have acquired a new fan base. 

The private investor clients of platforms such as Hargreaves Lansdown have been snapping up these stocks, persuaded that they are set to recover from their current lows.

In particular, they hope that Lloyds shares will sparkle when a new chief executive takes over from António Horta-Osório, who will be standing down next year.

Investors hope that Lloyds shares will sparkle when a new chief executive takes over from António Horta-Osório (pictured right) , who will be standing down next year

However, it is hard to see how any of the banks can rapidly or easily break free from pandemic-induced adversity.

Inflation is subdued and interest rates are close to zero, conditions that erode bank profit margins. A No Deal Brexit represents another threat to revenues.

Moreover, the Government has compelled the banks to protect businesses and consumers from the pandemic's wrecking ball.

Some analysts say that they have been treated almost like nationalised entities, although the Treasury now only has a stake in RBS as the Government holding in Lloyds has been sold.

Almost a million companies have received bank loans under Coronavirus support schemes.

The Government guarantees part of this lending, but some of the recipients would not under normal circumstances have been seen as a reasonable credit risk.

Close to two million homebuyers are benefiting from mortgage holidays, and people have been allowed temporarily to freeze their credit card and other repayments.

In the spring, banks were also compelled by the Government to suspend £8billion in dividend payouts. This move provoked anger among investors in Asia, HSBC's most profitable area of operation.

HSBC also controversially backed the Chinese regime's new security laws covering Hong Kong, despite opposition from both the UK and American governments.

In light of such problems, its poor performance is of little wonder. Its shares stand at 378p, lower than in 2009 at the nadir of the global financial crisis.

Donald Trump is contemplating a crackdown on Hong Kong that would cause more pain for HSBC and Standard Chartered, which likewise makes most of its money in Asia.

Other bank shares have also been left behind in the bounce back that followed the March market rout.

Barclays has fared a little better, however, because its investment banking arm has been involved in £3.3billion worth of fundraising drives for major firms.

RBS shares have been hard hit since lockdown, but longer term, there are high hopes for its new chief executive, Alison Rose.

Russ Mould of AJ Bell sums it up: 'The banks have horribly underperformed.'

He contends that the pressures will not lessen, since interest rates may turn negative, and regulators are most unlikely to slacken surveillance of the industry.

Challenger banks will also be seizing business from the major High Street names. In the worst-case scenario, Mould fears that the UK sector could face the same dispiriting fate as the Japanese banks, whose share prices remain near their 1989 levels.

Of course, the big banks are trying to respond. Lloyds, the owner of Halifax and Bank of Scotland, is Britain's largest mortgage lender. This leaves it exposed to a house price downturn.

But it has a joint venture with Schroders which could be the perfect platform for a major push into wealth management. 

This type of diversification may now be possible, given that the bank's £22billion PPI mis-selling debacle appears finally to have been resolved.

It has to be acknowledged that pre-lockdown, Lloyds and the other banks were in a far more solid financial state than before the global financial crisis of 2008.

Investors pursuing bank shares may also suspect, like Andy Haldane, the Bank of England's chief economist, that the recession will be V-shaped, with a sharp descent, then a swift recovery.

Yet even if recovery turns out to be rapid, analysts point out that the banks would still be left with the bad debts of the companies that have failed in past weeks.

As a result of such factors, Mould does not see bank shares as a long-term hold. 'They are stocks to rent and trade, for those who regularly monitor their holdings.' He adds that it is possible that banks could announce a dividend this year, payable in 2021.

Anyone who leaves stock selection decisions to the professionals may be relieved to learn that global equity managers have been retreating from bank stocks, shunning HSBC in particular, according to Copley Fund Research.

But bank shares still make up as much as 17 per cent of the portfolios of some well-known funds.

Morningstar data shows that Schroder Recovery, St James's Place UK Growth and Jupiter UK Alpha hold 15-16 per cent.

Jason Hollands of Bestinvest explains that some managers bought these holdings post-election when it seemed the Government's majority would help secure a decent Brexit deal and facilitate the levelling up of Britain.

Bank shares would be boosted if such goals are met, but the magnitude of the challenge is now so huge that investors need not only patience but also lots of luck.

Popular shares - Ocado

Ocado is one of the biggest risers in the FTSE 350 since the Covid-19 pandemic struck.

The online supermarket’s shares have jumped nearly 90pc since late February as demand for deliveries soared.

Investors will be looking for signs of further progress when it reports half-year results on Tuesday after cheering the City with impressive 40 per cent revenue growth during lockdown.

Its website was so popular it introduced virtual queuing, paused the app and prioritised loyal and vulnerable customers.

Overall half-year sales growth is expected to be around 27 per cent, according to Peel Hunt.

Next week investors will get the first opportunity to see how that sales growth translates into profit. Costs will rise because of the need to accelerate the building of warehouse capacity, buy vans and employ more drivers.

But some money will be saved on marketing, which is no longer needed as families flock to Ocado’s website, and reduced offers in lockdown will help margins.

The City will also look for an update on the Marks & Spencer deal, which launches in September, after claims this week that new customers could be barred from joining by the ongoing capacity constraints. 

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