Fears regarding the establishment of internet banks and their impact on traditional incumbents have ...
Fears regarding the establishment of internet banks and their impact on traditional incumbents have eased and the market seems more confident existing banks will be able to compete against their web-based competitors.
In the first quarter of the year the share prices of many banks bottomed out. From a one year high in June 1999 of 944p LloydsTSB fell to 503p. Since then prices have performed well with stocks also providing above market average yields. The share price of Lloyds- TSB has come back to 611p, offering a yield of 4.3%, while the FTSE All Share offers a yield of 3.29%.
The market realised incumbent companies had internet strategies and would be able to compete against the newcomers, according to Neil Cumming, the manager of Aberdeen High Income unit trust. The portfolio is slightly overweight financials with positions in the Woolwich and Abbey National.
Cumming says: "Egg has performed very well and although you can access your account via the internet, you cannot walk into a branch of Egg off the street. Both the Woolwich and Abbey National are developing internet sites and also have branches on the high street."
Woolwich's share price has also risen since the start of the year, when incumbents were regarded as under threat. It bottomed out at 245p on 21 January and has since risen to 295p, as at close of business 9 May.
Cumming favours those stocks over the better known banks. The high price to book ratio of LloydsTSB is a detractor on its share price, according to Cumming. He adds that the reason why he opted away from Barclays was that its share price performance was not as weak as those of its peers. Looking forward Cumming is likely to sell off some of his exposure to financials in around two months when he believes the stocks will be fully valued.
BWD UK Equity Income unit trust is also slightly overweight financials. The fund's manager Colin Morton is bullish on the sector with it providing decent yields and potential capital appreciation, however, he says interest rates are a large negative to the sector. He says: "I would increase my exposure if I thought interest rates had peaked, but I cannot say for certain that they have. From the US cycle it appears that the peak will be reached in between 9-11 months time. A rising interest rate environment is typically bad for financials."
Morton has exposure to the sector across the board from banks through to life assurers and general insurance companies. One of his favoured stocks is LloydsTSB. The share price had been trading at around £12 but following market speculation on the impact of the internet the stock was de-rated and trades now at around £6, according to Morton. He says: "It has been a good company producing double digit earnings growth. That situation is not going to change because it was slower off the mark than others in developing an internet strategy."
The fund also has exposure to general insurers which have been relatively dull, according to Morton. He says recently the news coming out of companies has been more positive with car insurance premiums rising by 20%.