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Proposed banking reforms contained few surprises, although Lloyds was the worst hit
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Bank share prices were relatively muted on the news
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Newton's Russon remains cautious on banking sector as a whole, although there are opportunities to be found
Ben Russon, manager of the Newton UK Opportunities Fund, examines the proposed banking reforms announced by the Independent Commission on Banking.
"The market reaction to Monday's announcement was broadly positive," says Russon, "although we will have to wait until September for final confirmation of the new measures. There had been concerns of draconian ‘subsidiarisation' - effectively the creation of completely separate and wholly individual retail and investment entities - but the proposed measures are less severe than anticipated. They do, however, still go as far as to safeguard retail deposit holders as well as removing some of the taxpayer risk associated with those banks that are ‘too big to fail', and in that respect, we believe that the proposals have been broadly well received. Evidently, the new rules will mean higher funding costs for UK banks, but these costs had already been largely anticipated by the market, and are certainly not significant enough to force large institutions to move away from the UK, as some had threatened to do," he adds.
"Bank share price reactions were relatively muted on the news, with Barclays and RBS up slightly while Lloyds Banking Group fell marginally. This is unsurprising," explains Russon, "given that Lloyds was the only institution picked out for special mention, regarding the expansion of its ongoing branch auction; the European Commission is already forcing it to reduce its market share in personal banking by selling 600 of its 2900 branches in the UK. He continues, "Clearly, Lloyds were always going to kick up a fuss on this point, but if it is implemented then it is still unlikely to have too much of an impact on the company's dominant market share in areas such as current accounts. There is, of course, the risk that Chancellor George Osborne decides to take harsher action come September, but we think that this would be both foolish and very unlikely given the importance of a strong banking sector to the UK economy."
Banking on quality
"In the Newton UK Opportunities Fund, we have some exposure to UK banks, with positions in Barclays, Lloyds and Standard Chartered. The latter is unaffected by the proposals, given that it doesn't have a UK retail business and that most of its business is in Asia. Meanwhile," he says, "we have holdings in Barclays and Lloyds1 given the attractive valuations that both companies are trading on, but we nevertheless continue to maintain a cautious view on the broader sector. Fundamental issues remain, such as the continued reliance of the sector upon liquidity support. Earnings expectations, in our view, are also some way above where they should be given the fragility of the industry. We believe that real risks remain prevalent and the sector is still far from being out of the woods. While in the near-term we are happy to take advantage of individual valuation opportunities," Russon concludes, "it will be some time before we are positive on the sector as a whole."
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