The expansion of retailers such as M&S and Tesco into retail banking has created more uncertainty for the UK financial sector, says Graham Spooner, investment adviser at The Share Centre. 

While Spooner believes it is too early to predict the results of these ventures, he thinks they could become yet another pitfall awaiting investors who buy the likes of HSBC and Lloyds because they are "cheap". 

"We don’t see any reason to rush into banks so we prefer to watch from the sidelines," he said.

"It’s all well and good saying they are cheap, but there’s a good chance that in five years' time these new banks or other unexpected factors scupper their recovery." 

"Even the banks themselves are saying it will take four or five years to get over the problems in the markets. If they are saying that, we believe it, as they always want to focus on the positives," he added. 

Spooner’s comments contrast with those of Sanjeev Shah, manager of Fidelity Special Situations, who told FE Trustnet last week that he thinks both Lloyds and HSBC are substantially undervalued.

Shah currently has 7.5 per cent of his portfolio in HSBC and a further 5 per cent in Lloyds, his two biggest holdings. 

Data from FE Analytics shows HSBC’s share price decoupled from the FTSE in early 2010 and has lagged the index since then.

Performance of stock vs index over 5-yrs



Source: FE Analytics

Richard Hunter, head of UK equities at Hargreaves Lansdown, says HSBC is a better buy than Lloyds.

"In terms of HSBC we are talking global diversification, robust balance sheets, a bank that didn’t need to take handouts during the financial crisis, one with a stable income and a yield of 4.8 per cent," he commented. 

According to Hunter, anyone looking for a mid-term financials investment should consider HSBC.

He says the picture for the sector at the moment is quite grim and new entrants such as Metro Bank, which has announced plans to float in 2014, will suffer from the same risk-aversion that is haunting its competitors. 

"With regard to Metro Bank, the down-side of floating at this particular time is banks are going to be treated with a broad-brush approach, so they will all be marked down by investors together," he explained. 

Hunter suggests a date in 2014 may have been chosen to give Metro Bank wriggle room, as it is likely to be aware of the risk-on/risk-off short-termism of today’s markets. 

Spooner says that Standard Chartered is another relatively strong pick among UK financials.

"It is often overlooked because it is so Asia-focused but it is UK-listed," he claimed. 

Shah’s second-biggest holding Lloyds is less appealing to both Spooner and Hunter. 

The stock has lost 94 per cent since July 2007.

Performance of stock vs index over 5-yrs



Source: FE Analytics