Debate: Are British high street banks a good opportunity for investors at the moment?
Yes – Richard Buxton is chief executive and a fund manager at Old Mutual Global Investors.
As a long-term investor in UK banks, the most recent reporting season came as a welcome relief.
The litany of conduct charges and regulatory changes that have hampered the sector are finally starting to ease. Although we’re not completely out of the woods, an end is in sight.
With focus returning to the business of banking, the underlying profitability of the sector is becoming more obvious.
Outside of regulatory pressures, the macro environment is also turning in favour of the sector. The downward pressure on interest rates brought about by quantitative easing (QE), which was a necessity for economies during the financial crisis, severely hit the banks’ ability to generate interest income, and therefore profits.
At long last, QE is close to being wound down. There is also upward pressure on interest rates, pushing up inflationary expectations.
Indeed, many of the headwinds that have blighted the sector are ceasing, and are even turning into tailwinds.
No – Jon Cunliffe is chief investment officer at Charles Stanley.
Over the years, the British banking sector has grappled with non-performing loans, higher capital requirements, and legacy issues.
While these are problems that are now being addressed, we are still slightly concerned about sluggish UK growth, which may begin to weigh on both revenue generation and the credit quality of the big banks.
Other challenges facing the Big Four include regulatory pressure and increasing competition from challenger banks, while the continued low level of interest rates is likely to subdue net interest margins.
This is likely to be exacerbated by maturing loans from the Bank of England’s Term Funding Scheme, with banks expected to repay the money they borrowed by 2022.
It is the banks that are not entirely UK-focused that look the most promising from an investment perspective. Our preferred stock in the sector is HSBC, which has exposure to growing affluence in Asia and higher US interest rates.