Interactive Investor

Och aye the "No" - something for the bank bulls

19th September 2014 11:13

Lee Wild from interactive investor

Finally, the uncertainty is over. The Scots have voted to remain within the United Kingdom and financial institutions north of Hadrian's Wall have breathed a huge sigh of relief. Global stockmarkets have, too, and the pound has headed higher. Panic over, right?

Well, a 55%-45% vote in favour of the Union is conclusive enough and shares in the big Scotland-based banks are certainly in demand, extending gains made over the past week since we ran a story backing the banks in the run-up to polling day (see chart). Royal Bank of Scotland is up 3% Friday, Lloyds Banking 2%, and Barclays 1%. Insurer Standard Life is better, too, and utility Scottish & Southern Energy.

Source: S&P Capital IQ

"We forecast a stronger UK economy on account of Scotland's decision which is now being capitalised into equity prices," says George Buckley, chief UK economist at Deutsche Bank. That's why he's sticking with a GDP growth forecast of 2.5% for next year.

The FTSE 100 (UKX) is certainly in bullish mood. But there is, as happened in Canada with Quebec separatists in the 1980s, the possibility of another plebiscite further down the road. Only RBS has actually ruled out shifting its HQ south of the border. The others have not. And the market reaction Friday has all the markings of a relief rally.

"As we felt might happen the "No" victory is slightly higher than that seen in recent opinion polls but the results are still split enough for this story to have some oxygen over the coming months/years," reckon analysts at the German bank.

"However, for now it will be a slow burner rather than an immediate constitutional and economic crisis hotspot."

That's true. Attention will inevitably shift back to Ukraine, the Middle East and interest rates, and Investec Securities, which tipped the banks to rally ahead of the poll result, is calling time on that trade.

"We see little further upside for RBS (Hold) or TSB (Hold), so close our "trading buy" on both names," writes bank analyst Ian Gordon. "On fundamentals, Lloyds (Buy) remains our preferred 'Scottish' bank." It's certainly interesting to note that Lloyds' share price has broken out above the trend line (see below).

Others see more value in the sector as a whole. Of course, the banks are susceptible to further heavy fines for previous indiscretions - something star fund manager Neil Woodford refers to as "fine inflation" and which prompted the recent sale of his stake in HSBC - but forget the Scotland-effect and focus on earnings, says Barclays.

"An upturn in the banks' profitability seems overdue given the historic two quarter lead provided by the CBI's measure of optimism in the UK financial services sector," write the broker's UK equity strategy team. (see below)

"And now that things finally appear to be improving, with domestic economic conditions feeding through into estimates, we suspect that this trend has further to run and it is simply a matter of time before the weekly EPS [earnings per share] improvements (shown in the chart below) feed through into the quarterly annual growth rate (see above)." That's why the broker remains overweight banks.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.