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'Banks have 40% upside on two-year view'

Citywire A-rated James Lowen explains why his JOHCM UK Equity Income fund has 39% in financial stocks. 

 
'Banks have 40% upside on two-year view'

Citywire A-rated James Lowen, co-manager of the £2.6 billion JOHCM UK Equity Income fund, believes bank shares have 40% upside over the next two years.

Lowen, who co-manages the fund with A-rated Clive Beagles, holds 39% in financials, which accounts to a 12 percentage point overweight position compared to the FTSE All Share index.

'We have also clear evidence that the regulator has indicated that banks have enough capital,' Lowen said. 'More of the underlying profits will come through directly and since the banks don't need to build up capital as much, it should come out as dividends, buy backs and special dividends.

'This is not captured in valuations. We have seen Lloyds begin to pay back more.'

Lowen is a fan of Lloyds Banking Group (LLOY) and added to his holding at the beginning of February, which made it a top 10 position. He believes that Lloyds can set the standard for other banks.

'Lloyds is perhaps the line in the sand,' he said. 'The other banks are at different parts of the journey. The one with the furthest to go is Royal Bank of Scotland (RBS), which is why we still don't own it.'

Barclays (BARC) on Monday slashed its dividend by more than half, sending its shares down 8% on the day. Lowen holds Barclays and says while the dividend cut was painful, he feels it makes sense to him on a long-term view.

'The bank is running down its non-core business and it costs money to do this. They cut their dividend because they are accelerating this rundown of non-core business,' he said .

'Barclays will take time to repair. I am disappointed the dividend was cut but we have to look forward and that is why we have a bias to add more.'

More broadly, Lowen said he is happier with the change in attitude he has seen from the government when it comes to banks and feels they will benefit from a Conservative government going forward.

'We have seen a dramatic change in political attitude towards banks in the UK since the election, he added.

'We saw that in the FCA leadership change in June, we have seen what the government has done to keep HSBC in the UK and we have also seen what they have done in putting a time bar on payment protection insurance (PPI). PPI has been a big issue for banks.

'We believe this sector has 40% upside on a two-year timeframe.'

Although rival fund managers like Alex Wright at Fidelity share Lowen's enthusiasm for banks, it is not a consensus view. Other leading fund managers, notably Neil Woodford, remain sceptical about the sector.

Over five years to the end of January, Lowen's fund has generated a total return of 47.2%, ranking it 44th out of 91 funds in the UK Equity Income sector.

2 comments so far. Why not have your say?

Anthony Tinslay

Mar 03, 2016 at 19:04

As far as a two or three year view is concerned I would back Lowen against either Wright or Woodford. Suggest look at Barclays e.g. and strip away the legacy(still continuing) issues and costs of restructuring and non-core and the remaining business looks rather profitable with plenty scope for a good increase in dividends as well as necessary increase in Tier 1 capital ratios..

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Broomtree

Mar 03, 2016 at 20:16

These guys had a couple of great years from 2012-2014 but all downhill since then, lost nearly 8% over the last year. I sold last summer just as it started to tip and although there has been some upside it's still well off my selling price. I suspect the banks have been a long running issue that has taken longer to come to fruition and may now [at last] have some solid basis.... Still a bit early for me after recent results

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  • JOHCM UK Equity Income A Acc
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Look up the shares

  • Royal Bank of Scotland Group PLC
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  • Barclays PLC
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  • Lloyds Banking Group PLC (LLOY.L)
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  • Barclays PLC (BARC.L)
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Look up the fund managers

  • James Lowen
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  • Clive Beagles
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