It’s been a great day all-round for the banks, with Barclays up over 2 per cent and Lloyds 1.5 per cent at time of writing. By contrast, the FTSE is flat today.
An improvement in the economic backdrop and the writing down of bad debts are said to be responsible for the £2.6bn profit in the six months to 30 June 2014. Chief executive Ross McEwan said the results reflected the bank’s steady progress, though issued a cautionary note.
"We are actively managing down a slate of significant legacy issues. This includes significant conduct and litigation issues that will likely hit our profits going forward,” he said.
"I am pleased we have had two good quarters but no one should get ahead of themselves here – there are bumps in the road ahead of us."
Star manager Richard Buxton (pictured), who heads up the Old Mutual UK Alpha fund, has been one of the biggest beneficiaries of the re-rating.
He counts Lloyds and Barclays as top-10 holdings, which have a combined weighting of almost 8 per cent.Buxton also holds global bank HSBC, and RBS lower down in his portfolio.
Unsurprisingly, the manager thinks that UK retail banks are among the most attractively valued stocks in the UK market, pointing out they are still well off their pre-crisis peaks.
“The areas where you could see significant re-rating is the banks,” he said.
“The market continues to worry about further tightening of capital requirements, fines from the US, investigations, Labour pledges to create more challenger banks are all putting people off the sector.”
Performance of stocks and index over 7yrs
Source: FE Analytics
“However with their current level, there is significant scope for re-rating if people get assurance on some of those issues.”
The graph above doesn’t include the gains made today.
Lloyds and Barclays have clawed back some of the losses made between 2007 and 2012, though RBS remains more than 90 per cent in the red over a seven year period.
Buxton and a number of other fund managers believe that it is a couple of years behind its fellow retail banks in its recovery, meaning significant gains could be on the horizon.
Among those betting big on RBS include the highly-rated Jupiter Growth fund, run by Ian McVeigh and Steve Davies. The fund has a 3.38 per cent position in the bank, making it its tenth largest holding.
McVeigh is also backing Lloyds and Barclays at the very top of his portfolio – they have a weighting of 8.08 and 5.58 per cent, respectively.
McVeigh’s fund has been buoyed by the strong performance of Lloyds in particular in recent years, helping it to top quartile performance in its IMA UK All Companies sector over a three year period.
However, talking back in May, he said that banks still have a lot of upside: “Although bank shares have risen strongly in the last couple of years, their share prices still look undervalued, in our view. The industry is highly regulated but we believe they can unlock more value by a better alignment of interests between staff and shareholders.”
“Through our regular meetings with managements, we aim to continue our dialogue, urging them to make further progress in this important issue.”
Another fund that’s benefited from its high bank exposure is Schroder Recovery, headed up by Nick Kirrage and Kevin Murphy. They count RBS as a top-10 holding thanks to a 4.21 per cent position, and also have big chunks in Lloyds and Barclays.
The fund has performed even better than Jupiter Growth over three years, and is a top-quartile performer over the past 12 months as well.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Murphy and Kirrage also hold Barclays in the top-10 of their £1.5bn Schroder Income portfolio, and have a sizeable position in Lloyds as well.
The duo think both companies will pay a sustainable dividend to investors before long, though are less optimistic about the still 80 per cent tax-payer owned RBS.
In total, only 10 funds in the IMA unit trust and OEIC universe hold RBS in their top-10.
Highly-rated value manager Alastair Mundy's Investec UK Special Sits fund are among these.
He is generally unimpressed by the amount of value on offer in the UK market, but thinks RBS has plenty of scope to re-rate from here, illustrated by a 2.9 per cent position.
FE Alpha Manager Mark Costar has been selling out of mid-caps in favour of large caps in recent months, and RBS has been among his biggest buys.
He currently has a 2.93 per cent position in his £331m JOHCM UK Growth fund, making it his tenth largest holding.
GAM is also big fans of the bank, holding it as a top-10 position in three portfolios, including FE Alpha Manager Andrew C Green’s UK Diversified fund.
Schroder Life GAIA QEP Global Absolute, SJP Global and THS International Growth & Value also include RBS as a top-10 holding.
Lloyds and Barclays are significantly more popular, sitting in the top-10 of 108 and 69 IMA funds, respectively.
Among the biggest supporters of Lloyds are Fidelity Special Sits and F&C UK Alpha, which both have more than a 5 per cent position.
Fidelity Moneybuilder Growth [4.7 per cent] and Schroder UK Alpha Plus [3.79 per cent] are among those betting biggest on Barclays.
Jupiter UK Growth is the only fund that holds RBS, Lloyds and Barclays in its top-10.
Twenty-six funds have major holdings in both Barclays and Lloyds, including Artemis Strategic Assets, Baring UK Growth, Jupiter Growth & Income and UBS UK Opportunities.
Buxton explained why he is generally bullish about the prospects for UK equities in a recent interview with FE Trustnet.
