Once the mainstay of most equity income portfolios, banks have had a torrid time over the past 10 years or so and have become unloved by UK investors.
Having been the cause of the global financial crisis, the sector came under a tremendous amount of scrutiny in 2008/2009. Regulations were tightened and dividends were cut, as the banks concentrated on repairing balance sheets and faced constant ‘stress tests’ from the regulators to make sure they had sufficient capital to manage the tough times.
Enter the challenger banks
In 2010, along came a wave of challenger banks: smaller, newly created, sometimes specialist banks that were more tech-savvy. It was hoped they would challenge the ‘big four’ of Barclays, HSBC, Lloyds, and RBS and shake up the sector.
The most well-known of these challengers is perhaps Metro Bank – the first high street bank to launch in the UK in 150 years. And, after a flying start, it listed on the London Stock Exchange in 2016 – the sixth challenger bank to do so – and by 2018 its shares were valued at over £40 each. But after an accounting error and failed bond sale, its shares plummeted and are valued at just 115p* today.
Indeed, despite the improvements made by all constituents, the sector has failed to reignite and in the ten years to the beginning of 2020, the sector had returned just 17.5%** compared to 118.3%** for the wider FTSE All Share.
And, even though they are part of the solution rather than the cause of the current crisis, year to date banks are still sitting on negative returns of 39.9%***, while the FTSE All Share has ‘bounced’ more and is down 15.8%***.
A second chance?
The pandemic has put banks in a very tricky position. At the forefront of the government’s economic response to the crisis, they are supporting businesses, offering mortgage holidays and have been told to suspend their dividend payments once again. And a world of continued low interest rates and possibly negative rates, does not help profits.
But this could be an opportunity for the sector to finally get rid of its ‘bad boy’ image, particularly as many banks are under new management. Metro Bank has replaced both its CEO and Chairman, the CEOs of both HSBC and RBS have also been in the job for less than a year, and Santander UK and Lloyds have both just hired new chairmen.
Could this be a second chance for a new generation of bank bosses?
Funds investing in banks
With dividends suspended once again, and a decade of poor performance dragging on the sector, banks remain largely unpopular, and it’s mainly the contrarian and value managers holding a select few in their top ten.
For example, ES R&M UK Recovery holds HSBC, Lloyds and Barclays^. Schroder Recovery has Barclays, Standard Chartered and RBS^ and TM CRUX UK Special Situations has Barclays and OneSavings Bank – the parent company of buy-to-let lender Kent Reliance^.
However, bank bonds have had something of a renaissance. Back in April, Jeremy Smouha of GAM Star Credit Opportunities fund, told us that bank bonds could be the bargain of the century in this podcast.