UK banks are aggressively marketing to the retail sector and concern is growing over the amount of p...
UK banks are aggressively marketing to the retail sector and concern is growing over the amount of potential bad debt being added to lending portfolios.
Brian Moretta, investment manager at SVM Asset Management, feels there are revenue generation concerns within the sector. Corporate lending has slowed but credit growth has been strong, he says, as has mortgage lending. However, Moretta believes it is unlikely this growth will continue at the same rate.
He says: 'Some banks such as HBOS and Lloyds have been more pushy in their marketing. They are more competitive on pricing. Lloyds has its current account with a high interest rate and it seems to be advertising a lot more on the television. Intelligent Finance, which is owned by HBOS, has been quite aggressive in the mortgage market.'
Jan Luthman, head of research at stockbrokers Walker Cripps Weddle Beck, adds consumer spending, although strong, is being driven by borrowing. He is concerned about how much further it can go.
Luthman believes the UK market is more in debt than ever before and its credit quality has deteriorated. Because of increasing competition between banks, he says, money is being given to more people and he expects to see a large rise in poor quality credit because people are over-borrowing and will not be able to pay back their debts.
He says: 'Credit cards have seen phenomenal growth over the past five to six years. The quality of debt is going to deteriorate, as borrowers will have trouble with their repayments. The consumer is already highly leveraged. The banks are constantly attempting to expand their loan portfolios and, as there is not a large demand on the corporate side, they are targeting the retail market.'
Luthman notes current interest rates on credit cards are very profitable but banks are being forced into lower quality areas of the market debt. He adds it is worrying they are not making adequate provisions for this occurrence.
The banks Moretta favours are those that have undergone some sort of corporate re-structuring or have a competitive advantage.
'I like Northern Rock as its market position is secure,' he says. 'I think Royal Bank of Scotland has potential for further development. Alliance & Leicester has gone through re-structuring to improve its business model as it had some management problems.'
While there are still concerns about growth in the sector, Moretta believes in general UK banks have robust balance sheets with a benign level of bad debt.
He adds: 'If there is a sustained market recovery, I do not think the banking sector will be the area that shows the most growth. I believe industrials and service companies will be the chief benefactors from any bounce. Provided investors choose stocks carefully, the banking sector should be a good investment.'
Luthman points out banks are very cyclical stocks and, as such, are more in line with the health of the economy.
'Banks are the ultimate economic stock,' he concludes. 'If there is a rise, they will be the place for investors to be.'
Consumer relatively strong.
Banking sector remains stable.
Should benefit from any market rally.
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
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