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What Woodford makes of the bank rally

by Emma Dunkley on Feb 18, 2013 at 10:34

What Woodford makes of the bank rally

Invesco Perpetual’s head of UK equities Neil Woodford has warned an improvement in banks’ profits is ‘unlikely and unsustainable,’ despite the sector leading the recent market rally.

The manager of the £10 billion Income fund cited Santander as a prime example, saying banks can only recognise losses when they have sufficient profitability.

Santander's full year results for 2012 showed pre-provision profits rising by 2%. However, provisions against real estate exposure and non-performing loans rose by 50% to €18.8 billion, which Santander said was thanks to ‘the strength of the bank’s earnings.’

Woodford said in his monthly update this statement is ‘an explicit acknowledgement that the lack of capital in the banking system means that banks can only recognise existing losses if they have the profitability to do so.’

The manager, who has long been negative on banks and has a zero weighting to the sector, said their on-going deleveraging and write-down of assets , along with the ‘hostile’ regulatory environment, renders their medium-term profit outlook unpredictable.

High conviction holdings take a hit

While the bank sector has led the recent market rally, Woodford says his fund still managed to deliver a ‘respectable’ performance over the last month, despite two of his largest holdings – Imperial Tobacco and AstraZeneca – taking a hit to the share price.

Imperial Tobacco’s shares dropped 4% at the end of January on the back of the firm’s interim management statement, in which it said ‘the macro environment continues to be challenging; towards the end of the first quarter and into January, market trends have worsened in a number of key markets including in the EU and Russia.’

Woodford said: 'Despite the initial negative share price reaction, we are actually, if anything, feeling more positive about the long-term outlook following these updates.’

He added: ‘But if tobacco companies are having a tough time in Europe, think how bad things must be for everyone else!

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