“There are interesting business models within the smaller banks, but the real value is in the traditional big banks,” Cullen expanded, adding that he has topped up his position in Barclays twice in the past month.
“There are people who have not wanted to touch Lloyds and Barclays because of the PPI and conduct fines and gone into the challengers instead, but we see an opportunity in the bigger names.”
Boucher currently holds roughly 12% long and short positions in UK financials, including a 1.8% long play in Aviva, though he is unimpressed with prices on offer elsewhere.
“When challenger banks came into the market everyone was wanting to play the theme of the big banks having to withdraw from certain areas,” he said. “There is some very exciting growth in the challenger space, but because of general overexcitement they have all come on to quite high ratings.
“Banking is an important part of the UK economy for many reasons, but you have to separate the businesses from their share prices. While challenger banks are good for UK equities I would not necessarily want to buy them.
Boucher continued: “Also, the bank levy has been changed into an overall ‘bank tax’, so while the big banks were the only ones that had to pay a levy, now it is any institution worth more than £25m.
“We have closed our short positions in challenger banks just because they got hit so hard by the Budget announcement, but it is an area that we would be looking to short again once the time is right.”
Conversely, Brittain believes that it is in the larger institutions that there may be valuation discrepancies.
She countered: “Some of the ‘legacy’ banks have back books and they could be mispriced, whereas a lot of the challengers did not exist when [issues stemming from the crisis] started so they do not have these balance sheet issues.”
Moving forward, it appears whether the legacy or challenger firms pose the better investment story depends upon the respective impacts of interest rates, bank levies and regulatory bodies – though based on our managers’ views, the larger institutions just about edge it.
Other than that, it is anyone’s guess.
