Mundy: Why cheap banks are still too risky to buy

Investec's Alastair Mundy has warned against investing in UK banks despite historically low valuations, with the threat of nationalisation looming large over leaders in the sector.

The manager of the £450m Investec Special Situations fund, as well as the £1.9bn Cautious Managed portfolio, said, with the exception of HSBC, he is avoiding all banking stocks in the UK because of the ongoing risks they face.

"Banks look cheap, but before they exhibit that cheapness they could go bust," he said.

"There is a significant risk they could be nationalised if credit markets become dysfunctional again, and to us banks have got value trap characteristics."

Mundy's Special Situations fund aims to buy shares which have fallen sharply in value - usually by at least 50% - and which are out of favour with the market.

The contrarian investor first screens the universe for the worst performing shares before carrying out more detailed research into balance sheet strength, valuations, and challenges to the sector.

However, he also aims to avoid catching "falling knives", and he continues to steer clear of all banks except HSBC despite a sell-off which has left many of them near, or at, historic lows.

Mundy is backing HSBC alone in the banking sector because of its balance sheet strength.

He said: "It has a lot of deposits and not many loans so it can increase market share, and for other banks to catch it they need to strengthen balance sheets. This process could take rivals a number of years."

HSBC's share price remains severely depressed compared to earlier this year, following the sell-off in the summer.

From a high of 731p in February it hit a low of 471p earlier this month. Although it has bounced a little off lows, at 535p it remains around 25% off its recent peak.

Other banks are still depressed, with Barclays 45% lower than its February peak of 330p, trading at 180p.

Part nationalised banks RBS and Lloyds are 50% cheaper than at the start of the year.

Only Standard Chartered has outperformed HSBC this year, with shares down about 20% at £14.27 compared to the 2011 peak of £17.69.