The manager of the £2.3 billion Citywire Selection Fidelity Special Situations fund said since the problems in 2008 and 2009, Lloyds has seen its capital, funding and operational performance improve significantly and that it is a ‘three to four year type of equity story’.
In a conference call he said: I’ve recently met three people in Lloyds in its key management team – Mark Fisher in charge of integration of HBOS and Lloyds, the head of retail and its CEO Antonio.
‘All the things they are doing operationally and strategically in the franchise – things are getting significantly better,’
He said the bank is taking significant market share in deposit gathering, while provisioning ratios continue to come down, which serves as a decent tailwind for earnings.
‘In funding, they are ahead of the curve and capital ratios have improved dramatically from levels in 2008,’ Shah added.
Even in the unlikely, worst case scenario where house prices fall by 18%, and unemployment goes up to 10%, Lloyds would have to raise £9 billion more in capital, which would push returns out to 2016.
‘Even in that scenario fair value for that company is 38p,’ said Shah. ‘So the downside risks are very well underpinned.’
In contrast, Shah said he has ‘less exposure’ to investment banks such as Barclays and believes regulation will increase and create stronger headwinds.
Shah also has a small position in RBS and said he is ‘very supportive of the management team there and the direction of travel.’
He added: ‘They are coming back to core retail banking in UK and being essentially more focused on retail banking; however the complexity of the turnaround is tougher than the Lloyds situation. RBS is interesting because of the strategic levers that can be pulled.’
He added: ‘ Medium term, they will come back to being a pure UK retail and commercial bank; valuations are very much supportive of having the position I have which is 100 bps.’
Over three years to the end of July, Shah has returned 18.06% on the fund, versus the FTSE 100 Total Return's 35.83%.