The consolidation of the UK financials sector is continuing as major players look to streamline cost...
The consolidation of the UK financials sector is continuing as major players look to streamline costs and produce further productivity gains
For many fund managers Bank of Scotland's surprise £21bn bid for NatWest is the move which should spark off renewed action in the sector
The main threat to high street banks and building societies is the new entrants ‹ Prudential's Egg and Standard Life. These offer higher interest rates and cheaper lending rates because they are not supporting a costly branch network. The cost of originating a mortgage with a traditional mortgage lender is 10 times that of a new entrant, allowing new players to compete aggressively on price, according to Norwich Union
Iain Brown, UK fund manager at Norwich Union, says the banking sector will remain under pressure even after the industry consolidates
He adds: "The fact one company is taking over another doesn't alter the long-term dynamic much. It is happening to help stave off the inevitable competition. It might help an organisation survive but it doesn't mean it is going to flourish
Brown is neutral on the financial sector, saying that although banking is not an attractive industry in the long term, it does not make sense to be negative in the short term because of expected gains from consolidation
Richard Peirson, fund manager of the Framlington Financial Fund, expects high street banks will eventually reach a level playing field with the internet banking services
He says: "The high street banks are moving to cut their costs. It is inevitable high street banks, such as Barclays, will turn more and more to offering internet services. The jury is still out as far as internet banks go but at the moment they are performing well against the traditional banks
Peirson cites Abbey National as one of the most promising financial stocks, saying it had been left behind even though it had strong management and its stock valuations are attractive relative to its peers
Mark Whittaker, fund manager of the MFM Hargreave Hale UK Growth Unit Trust, holds an overweight position on banks amid expectations of further consolidation in the sector. His focus is on the bigger banks. NatWest is one of the portfolio's largest holdings, accounting for 3.8% of the assets. There are also holdings in Barclays and Lloyds
Pouneh Taheri, fund manager of the UK Growth Unit Trust at Sanwa, expects most movement among the smaller sized banks because of regulatory concerns over-shadowing the bigger players. The Sanwa UK Growth Unit Trust is neutral on financials. Although consolidation in the financials sector is considered positive, that is counteracted by expectations of rising interest rates
Taheri likes Lloyds as a holding because it is the best strategically-positioned bank in the sector and NatWest, for the opposite reason because there is the opportunity to do much more with the business and to improve productivity. Fund managers agree there is little case for looking abroad to Europe in the consolidation process
Taheri says: "At the moment the financial services market is still geographically organised and there are few cost savings to be gained from removing overlapping infrastructure. This type of pan-European consolidation is, however, likely to make sense in the medium term when a truly European financial services market begins to develop
Whittaker agrees, saying there is a strong case for consolidation at home before looking abroad, particularly as the UK financials sector is so diverse
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