FE Alpha Manager James Thomson (pictured) has bought banking stocks within his Rathbone Global Opportunities fund for the first time in a decade. 
While he says banks are prone to suffering from a “growth addiction” which can mean that fundamentals such as risk management and customer service are overlooked, he has nevertheless added two new holdings from the sector.
These holdings were chosen entirely based on their bottom-up fundamentals and the fact that, paradoxically, they don’t exhibit any of the usual banking traits that make the market area unappealing to the manager.
“All of the problems with the banking sector can be attributed to one thing: chasing growth,” Thomson (pictured) said.
“This is a sector that chases growth when it should be managed for risk. Just this week another scandal has emerged with gold-plated Wells Fargo as they were allegedly opening millions of fake accounts to drive growth.”
“This growth addiction has still affected a majority of the banking sector so, in my view, it’s still largely ‘uninvestable’. But, we have found two banks that have returned to old fashioned banking. A focus on risk and not growth, a focus on customer service and decentralised decision making.”
The banking sector divides opinion among many investors, particularly since the collapse of Lehman Brothers in 2008 and the ongoing repercussions of the global financial crisis that are still being felt across markets.
Because of negative sentiment, banks are often favoured among deep value investors. Since the start of 2009, the FTSE World Banks index has underperformed the FTSE World index by 82.46 percentage points with a total return of 67.02 per cent.
Performance of indices since 2009
Source: FE Analytics
In an article published at the end of last year, Investec’s Alastair Mundy told FE Trustnet that he is seeking solace in blue-chip banks while markets are otherwise in the throes of “value hell”.
“My comfort blanket at the moment is Royal Bank of Scotland – it’s a very strange comfort blanket that no one would usually go anywhere near. Other people seem to have common comfort blankets, but the problem is when they disappoint, they’re all going to want to be throwing out that comfort blanket together and I’m not going to be buying that comfort blanket off of them,” he said.
Not everybody shares this sentiment though, with a number of investors citing a lack of transparency and hefty fines from regulators as reasons for shying away from the sector.
While Thomson - who looks for under-the-radar and out-of-favour stocks - dislikes the sector generally, he has added US private banking company First Republic and Swedish challenger bank Handelsbanken to his portfolio. These will be held as part of a concentrated portfolio of between 40 and 60 stocks.
“First Republic bank in the United States is the Ritz-Carlton of banking and the risk management mantra works,” the manager explained.
“Non-performing loans are 0.13 per cent versus industry averages of 3 per cent. [It has] some of the best return on equity in the industry and their customer service ratings are better than Amazon and Apple.”
“Handelsbanken in Sweden follows the same approach – decentralised, relationship-driven banking, is managed for risk and has extremely low loan losses.”
“This is a grey haired challenger bank – it is almost 150 years old with a dominant prevalence in the Scandinavian countries and has just 200 branches in the UK. Their sector branches look more like B&Bs.”
When it comes to UK banks though, Thomson remains sceptical due to a lack of customer service, interest rate sensitivity and their desire to continue chasing growth rather than focusing on risk.
This is despite the fact that that some deem UK banks to be an attractive value play at the moment, given that Lloyds currently pays a dividend and RBS is likely to restart paying dividends in the near future.
Performance of indices in 2016
Source: FE Analytics
According to data from FE Analytics, more than 13 per cent of funds within the IA UK All Companies and IA UK Equity Income sectors have Lloyds as one of their 10 largest holdings. That said, it must be noted that Lloyds Banking Group accounts for 2.05 per cent of the FTSE 100 and 1.66 per cent of the FTSE All Share.
“[UK banks] are chasing growth when actually they should hold up their hands and say, “this is a non-growth industry. We need to manage our business for risk and, if growth comes, that’s nice to have but it’s not our primary driver”,” Thomson continued.
“They need to focus on customer service and I don’t think many people will applaud the customer service they receive from their local bank. Many are dissatisfied and usually when you talk about a bank, a profanity follows not too long afterwards.”
“I think it’s too hard to change the traditional mould. You have to go with banks who have this in their DNA and there aren’t many of them. We found two of them but I don’t think there are many more.”
Since Thomson has been at the helm of the £828m Rathbone Global Opportunities fund, it has returned 382.29 per cent, outperforming its sector average and benchmark by 219.41 and 159.69 percentage points respectively.
Performance of fund vs sector and benchmark under Thomson
Source: FE Analytics
It is also in the top quartile for its total returns and risk-adjusted returns (as measured by its Sharpe ratio) over three, five and 10 years.
The fund has a clean ongoing charges figure of 0.79 per cent.