Fears the internet would undermine bank margins have been proved wrong with the sector returning 14....
Fears the internet would undermine bank margins have been proved wrong with the sector returning 14.03% over the 12 months to 29 December, according to Forsyth McGarrity, director of UK Equities at Scudder Threadneedle.
McGarrity says: "The effect of the internet has not been as dramatic as expected. The main effect of technology has been that pricing is much clearer as the best rates can be seen online and money can be shifted around easily."
He notes over the past year there has been a large amount of consolidation with the Royal Bank of Scotland buying Natwest and Barclays acquiring the Woolwich.
He points out that there is curiosity concerning whether the Royal Bank of Scotland and Lloyds will merge and if Lloyds will acquire Abbey National. He believes the letter is likely and thinks it will undermine Abbey National.
He says: "The UK has a three tier banking market. There are the growth stories such as HSBC, which is a true blue chip and trades on a high P/E of 19. Then there are companies such as Alliance and Leicester, which trade on P/E of 11. In the middle there are companies like Barclays and Lloyds on P/Es of 13."
He sees good earnings growth from banks and believes the credit quality in the UK to be good. McGarrity has holdings in HSBC and Barclays and is less keen on companies such as Halifax, believing it will disappoint. He says: "Lloyds TSB has run out of steam. Lloyd's did a great job of UK domestic banking and acquiring TSB. We did not like the acquisition of Scottish Widows as it is a company with problems."
Eric Moore, UK fund manager at Gartmore, takes a cautious attitude towards banking, due to competition issues. There is a trend forming for mono-line companies, which offer only the more lucrative areas of banking, such as Egg and Goldfish, he says.
He adds: "Mortgages were stable business for banks as people don't generally move out and the rates are high. Now the internet is facilitating mono-line companies that have no existing client base and want rapid distribution."
Moore does like the area of small business lending as it does not suffer heavily from competition. It is also difficult to transact online and the lenders need to understand the business models and create good relationships, he says. He adds: "The Royal Bank of Scotland and Barclays have in excess of 25% of this market."
The demographic move towards an ageing population is the driver for investor interest in life assurance, Moore says.
He holds Prudential, Legal & General and CGNU. Gartmore has a 5.5% weighting in life compared to it making up 4% of the UK market. "The sector has made money from investment gains and secular trends are becoming very powerful," he says.
McGarrity agrees with Moore believing there to be strong volume growth in life assurance. He says: "Margins may come under a bit of pressure but as more people provide for their futures, the next five to 10 years offer reasonable prospects."
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