The wider banking sector is also attracting quite a few fans which warrants a sector reappraisal
Thursday 05 Dec 2019 Author: Daniel Coatsworth

Banking group Lloyds (LLOY) has in 2019 enjoyed its best year on the stock market since 2013 in share price terms. It has also been the best performing London-listed bank.

That’s quite an achievement for a stock that has seen some wild swings in its share price. Eight years out of the past 14 have shown negative annual share price returns.

Many investors have held Lloyds for a long time in the hope that it would return to the dividend glory days seen before the global financial crisis. Their patience would have been tested by the credit crunch, PPI scandal and the rise of challenger banks.

It seems perplexing that so many people would be willing to put up with an industry beset by mis-selling fines, tighter regulation and clunky IT systems just to collect a dividend. However, patience is now being rewarded.

Investec fund manager Alastair Mundy has been a fan of the banking sector for some time because many of its constituents’ shares have been cheap.

‘All I want them to be is dull and boring,’ he tells Shares. ‘I think there is a great chance of that (happening) because they were the opposite 10 years ago. They were lightly regulated, they were very aggressively managed and they had very weak balance sheets. That to a certain extent has been sorted out.

‘They are not in the market for doing so many stupid things. What they’re doing is lower risk lending to ensure their balance sheets are strong. If they can generate stable profits and pay those profits out as high dividends, I think that will win them some fans among investors.’

Analysts at Morgan Stanley are also excited about parts of the banking sector, particularly UK names. They believes higher fiscal spending next year could be a key catalyst to improve earnings and drive a re-rating of UK domestic banks.

Likewise, Jefferies’ analysts believe either a Tory or Labour majority election outcome could lead to more than a 100 basis point increase in UK interest rates. Banks can earn more money as rates rise and so all eyes should be on the sector’s earnings forecasts once the general election result has been announced.

Investors should always have an open mind and now is a particularly good time to reassess the banks. There are still plenty of negative points such as Brexit uncertainty clouding the UK’s growth prospects but it seems like the dial could be swinging more in their favour.

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