The UK retail banks were pummelled and in some cases shattered by the financial crisis in 2008, with the two main players – RBS and Lloyds – forced to allow the state to take a significant stake in them rather than go under.
The general economic gloom weighed heavily on banks with a large UK presence, while there was a sector-wide scramble to set aside ever-growing sums of money for mis-selling scandals that seemed to confirm the opinion of the general public that this was a sector failing ethically as well as financially.
But the picture is very different now.
While the Government is preparing to sell at least part of its stake in Lloyds – and it looks like it will make a profit – the economic climate in the UK is steadily improving, making the future for UK retail banks look rosier.
The fillip offered to the housing market through the Help to Buy scheme announced in the most recent Budget is one factor, but consumer confidence and both service and manufacturing PMIs have been rising.
The most optimistic commentators have even been looking ahead to a future sale of RBS, still 82 per cent state-owned.
But is this apparent recovery in the sector merely due to a generally improving economy lifting an economically sensitive sector along with it? Are investors in danger of being caught up in a scramble for the riskiest assets that will leave them with egg down their shirts?
Bestinvest’s Jason Hollands (pictured) thinks there are good reasons to look at the sector again.
"The banking sector historically was interesting because it was a big dividend-generating one, but that obviously hasn’t been the case for some time," he said. "As the outlook for the sector improves, we would expect dividends to start rising again."
"The banks have done a lot of restructuring in recent years and have become more stable. They have reduced their exposure to more volatile areas like investment banking and should be more stable, cash-generative businesses," he added.
"It’s an area that has seen quite considerable restructuring and changes in management, so the businesses should be more investable."
Graham Toone, head of research at AFH Wealth Management, is far more cautious.
"We only really hold one banking stock and that’s HSBC. It’s not so UK-centric, more global in nature and it hasn’t been so badly affected by the crisis. It has been paying a dividend all the way through," he said.
Many investors, professional and otherwise, preferred to hold Asian-focused HSBC during the years of crisis for the reasons cited by Toone.
Standard Chartered is the other Asian-focused bank that looks attractive, but the problem is the valuation, he explains. However, the improved outlook for the economy is making him start to look more closely at its UK-focused peers.
"The UK banks like Lloyds and RBS – we are looking at this area, it is under review, but we have been quite cynical about banks for some time and we will take a lot of convincing," he said.
"RBS and Lloyds are more sensitive to the economy. You have to look at them on a company-by-company basis."
Toone (pictured) only wants to hold stocks that pay a dividend, and although Lloyds said it aims to pay out two-thirds of its profits as dividends over the coming years, it has yet to put that into practice. He is also less than enthusiastic about holding even HSBC.
"We feel we don’t really like to have no exposure to a particular sector at all and we want to have some exposure as risk control," he said.
"A lot of fund managers will say they [banks] are hard to understand. The business models aren’t the most transparent. They are so complex in nature it’s hard to make the investment case."
Some fund managers have begun to build up a significant weighting to the UK banks, perhaps inspired by the stellar gains recently made by Lloyds in particular.
The stock was the best-performing FTSE 100 company of 2012 and has continued its strong run in 2013. Since its low in November 2011 it is up 237.01 per cent, according to data from FE Analytics.
Performance of stock over 3yrs
Source: FE Analytics
Barclays and RBS have also both made strong gains over the past year, beating HSBC over this time and more than doubling the returns of the FTSE All Share.
Performance of stocks over 1yr
Source: FE Analytics
Two managers who have found value in the sector are Ian McVeigh of the Jupiter UK Growth fund and contrarian manager Ben Whitmore, who runs the five crown-rated Jupiter UK Special Situations fund.
Jupiter UK Special Situations is one of only four UK funds to hold RBS, along with two funds run by Barclays Wealth and Standard Life UK Equity Recovery.
FE Alpha Manager McVeigh holds 8.22 per cent in Lloyds, his biggest position, as well as 5.41 per cent in Barclays and 4.73 per cent in HSBC.
For the time being, Toone says he is happy to stick to HSBC and the insurers for exposure to financials.
"The financial sector is quite a broad church. One area we have been looking at very closely and where there are a couple of stocks we like is insurers," he said.
Toone tips Aviva and RSA in particular, even though Aviva had a wobble earlier in the year when it had to cut its dividend amid a restructuring programme.
"The insurers have gone through this dividend cut and it has put them on a more sustainable footing," Toone said.
Hollands suggests that private investors could be better off going through a fund rather than picking stocks directly.
"We would play the theme through Polar Capital Financial. They have a superb team and they recently launched a trust focused on financials."
"Unlike some of the more popular trusts that focus on financials but invest in non-banks, it does have some exposure to the banking sector."
The £164m Polar Capital Global Financials trust was launched on 7 July and is already trading on an 8 per cent premium.
The firm also has a $22.4m unit trust that has made 24.47 per cent over the past year. It has 54 per cent in banks, but is global in remit, with only 4.4 per cent in the UK.
The £55m Polar Capital Financials Income fund, which has five FE Crowns, has made 30.2 per cent over the same time and 43.56 per cent over three years. It is currently yielding 4.7 per cent. It has 22.5 per cent in UK equities and 2.7 per cent in HSBC.
