We just added Barclays and Lloyds to our equity list. Both banks are now looking interesting, giving potential interest rates hikes in the UK. The pound continued to rally against other currencies last week after UK inflation accelerated more than forecast, prompting investors to bring forward expectations for an interest-rate increase by the Bank of England next year.
While Lloyds and Barclays are most exposed to consumer credit, we think that enough risk is already factored in. Lloyds provides a dividend yield of 8%, while Barclays is one of the cheapest banks in Europe, despite fixing capital and closing Non-Core.
Barclays (CC Price Target 230p)
Barclays was solidly profitable throughout the recent banking crisis, but significant regulatory tightening has imposed much higher capital requirements on its largest business, the investment bank. UK retail and Barclaycard are performing well, but there is significant restructuring required to push the investment bank to double-digit returns on equity. Barclays has a high quality loan book, which should offer protection if the macro economy turns down.
Lloyds (CC Price Target 80p)
Lloyds Banking Group (LBG) was created on 19 Jan 2009. Lloyds TSB acquired its main domestic rival HBOS following the latter's near-collapse in H208. This created a UK 'national champion'. LBG is the market leader in current accounts (30% market share), savings (23%), credit cards (20%), mortgages (28%) and personal loans (22%). LBG will be the 2nd largest lender to SMEs (24%) and the 3rd largest lender to mid-sized and large corporates (20%). These market shares will be cut when the group sells a network of 600 branches as an EU-enforced condition of state aid.
EUR-GBP
We also think, from a currency point of view, it is interesting taking a position in the Sterling at this point in time. We think the EURGBP bottomed when it peaked at £0.93. We see some strength in the Sterling going forward. This does not mean we see significant gains in the Sterling. Brexit negotiations remain a concern. However, some GBP exposure in a portfolio should result in positive gains going forward.
Conclusion
Despite equity markets rallying strongly, we believe that there is still value out there. A well-diversified portfolio, which is focused on sectors that are expected to outperform in the current environment, should continue to reap rewards from the equity market.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.