Investors should think twice before scooping up shares in the beleaguered Royal Bank of Scotland, according to The Share Centre analyst Helal Miah, who says despite a rumoured sale by the bank’s biggest owner – the UK government – they will be left waiting a long time for any material upside.
Banks divide UK fund managers seemingly like no other sector of the equity market. Some such as Schroders’ Nick Kirrage and Kevin Murphy and Investec’s Alastair Mundy believe they offer great long-term value following the disastrous falls since the 2007/8 financial crisis.
Performance of stocks and index since 2007
Source: FE Analytics
Others such as Franklin Templeton’s Colin Morton and Columbia Threadneedle’s Richard Colwell warn that the stocks are best avoided.
Just under 10 per cent of funds in the IA UK All Companies sector now hold RBS as a top 10 holding. Out of the 274 funds in the sector, 22 have more than 2.5 per cent of their portfolios in the stock. One year ago just 3 per cent of funds held it as a top 10 position.
Miah (pictured) says UK banks in general are, when stripped of money set aside for potential fines, just about profitable but they are still very risky with RBS the most hazardous of the pack.
“We are not too keen on RBS. If you want a UK retail focused bank then look at one of the others. We haven't liked this company for a long time and generally don't like the banks and especially RBS,” he said.
“Most of the banks are looking healthier as the days go by but we haven't got to the point where we think RBS is worth investors buying into it. Lloyds certainly seems to be progressing along a path to recovery far quicker.”
“RBS is a giant. It still has a lot of issues in terms of the clean-up process from the whole financial crisis. It still has a whole investment banking division and the fact that the government still owns a huge chunk is bad. When Lloyds was sold in different chunks we saw the share price fall about 5 per cent.”
The analyst adds it is more than likely that something similar will happen with RBS and investors will see a decline in the share price.
Miah says there are too many issues going on currently to see an end to RBS’ woes and that until it can return to being able to easily pay regular dividends it is in for a prolonged period of stagnation.
“Its [stagnation] will probably continue for a while. Let's not forget this sale won’t happen in one go and so as we saw with Lloyds it is going to happen in chunks here and there,” he added.
“Also, they are not going to pay a dividend for some time yet – the earliest is probably around 2017. In the past, the reason most people invested in banks was the very attractive dividends they used to pay. It won’t be the case with RBS for a while yet.”
One notable fund manager who has been generally very bullish on UK banks including RBS of late told FE Trustnet off the record that the government would be much better off waiting until the back end of September for the share sale.
“From a practical perspective a lot of people are on holiday, especially a lot fund managers. So a lot of the big buyers are not around. Also a lot won’t have seen the CEO post its latest results last week. No one is keen on buying large chunks of shares until you have had a good chat with senior management,” they said.
“It is likely the [regulator] Competition and Markets Authority will come out with an official view on retail banking following their probe and this is very important. It is worth seeing that before taking a view.”
Miah also points out that a lot of the bank’s cash is being reserved for any regulatory fines that may crop up in the future.
“They have so much set aside a lot [of money] for restructuring provision and they still have PPI issues to deal with. Also they have another issue with the big FX rigging scandal in the US which they have had to set aside £2.5bn for.”
Some of the biggest bulls on RBS include GAM UK Diversified, which has 4.8 per cent in the stock; Investec UK Special Situations with 4.4 per cent; Schroder Recovery with 3.91 per cent; and Jupiter UK Growth with 3.87 per cent.
Many of these also hold other UK high street banks such as Lloyds and HSBC as well. The banks are much less popular among equity income funds, who were once stalwart holders of these stocks.
However, some say a change is starting to precipitate with investors keener to hold banks as the commitment to dividends becomes more apparent – seen this year in the first pay-out to shareholders of Lloyds since 2007.
One global equity manager attracted by the high yields on bank stocks is James Davidson, who heads up the £85m JPM Global Equity Income fund.
He currently has a third of his fund invested in financials, a position comprising mostly of banking stocks having increased his exposure to financials from 15 per cent to 25 per cent.
“With banks having been ‘bashed to bits’ as a result of substantial fines and regulation hitting them from all directions, many dividend investors have been weary of investing in this sector since banks cut their dividends during the financial crisis,” he said.
Davidson says banks are also further helped by the impending US interest rate increase, which will help to improve net interest margins.
“We are monitoring RBS and see it as offering dividend potential once they are through the litigation but see in the meantime more immediate dividend prospects in European banks such as Danske and ING and are already overweight attractive income producing names in the UK such as Direct Line and Berkeley Homes.”