As government mulls RBS sale, is now the time to buy banks?

Since the global financial crisis began to gather momentum some 10 years ago, UK banks have struggled. While the FTSE All Share has recovered and returned almost 100%* for investors over the decade, the banking sector, which fell some 70% to the low in March 2009, has lagged behind and the sector remains 12.73%* lower than it was 10 years ago.

With the exception of a brave few who may have invested at the market bottom and enjoyed a brief but strong bounce, investors have generally not been rewarded by sticking with these unloved companies and would have done better if they had looked elsewhere.

However, over the past couple of years, the sector has started to see a bit of a turnaround. Over two years, it has outperformed the broader FTSE All Share index by just over 10%**. With the government rumoured to be looking to sell its stake in the Royal Bank of Scotland this week, is now the time to invest?

Three funds investing in UK banks

Three Elite Rated funds currently have Royal Bank of Scotland (RBS) in their top 10 largest holdings. Jupiter UK Special Situations is one, and also holds Standard Chartered. Investec UK Special Situations is another to favour RBS along with Barclays and HSBC. The third is Schroder Recovery, which has four banks amongst its top 10: RBS, Standard Chartered, HSBC and Barclays.

All three funds are run with a ‘value’ investment strategy. The managers are actively looking for companies that are unloved and cheap but which they believe have more potential than the wider market believes.

Juliet Schooling Latter, research director at FundCalibre, commented: “The banking sector does still look good value compared with other parts of the market, and, if interest rates go up, it will be a more favourable environment for them. However, with recent economic data having been downgraded, I am not convinced we will see rates rise soon (or significantly). I think US banks are perhaps more interesting, as they are already enjoying higher interest rates and there are more on the cards.”

Three funds investing in US banks

T. Rowe Price Global Focused Growth Equity is an example of an Elite Rated fund that is seeing opportunities in US banks, with J. P. Morgan Chase & Co amongst its top 10. Fidelity Global Dividend is another. Dan Roberts, the manager, favours US Bancorp, the parent company of US Bank National Association (the seventh largest bank in the US). In contrast, he owns none of Bank of America Corporation, which is 0.7% of the MSCI AC World index. Brown Advisory US Flexible Equity is the third fund. The managers of this fund have three banks in the top 10: Charles Schwab Corporation, Wells Fargo & Company and JP Morgan Chase & Co.

Are bonds a better option?

While the number of listed UK banks is relatively small in number, in the fixed income asset class there is far more choice. Each bank will have multiple types of bond in issuance: in different currencies, with different maturity dates and in different parts of the capital structure.

The sector is very popular amongst Elite Rated bond funds and the allocation to the sector is far higher. For example, Invesco Perpetual Corporate Bond fund holds bonds from Barclays, Lloyds and Santander UK in its top 10. Rathbone Ethical Bond has 31% invested in the sector and holdings include Barlcays and HSBC. Away from the UK the manager also holds Dutch multinational bank Rabobank Nederland. Finally, TwentyFour Dynamic Bond fund has just shy of 24% held in bank bonds. Amongst its favourites are Nationwide Building Society and Coventry Building Society.

*Source: FE Analytics, total returns in sterling, 10 years to 29 May 2018 looking at the FTSE All Share and FTSE All Share Banks sectors.

**Source: FE Analytics, total returns in sterling, 2 years to 29 May 2018 looking at the FTSE All Share and FTSE All Share Banks sectors.

All fund holdings data sourced from the company fund fact sheets as at end of April 2018

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.