Bank Shares Rally on Consolidation Hopes

Strategic Insights -

Investors showed renewed optimism in the UK banking sector this week, following Barclays' £5.4bn bid for Woolwich, a former building society. The news sparked a significant rally in bank share prices, with many increasing by over 5% in a single day. However, despite the positive short-term trend, many bank shares remain below their highs reached last year. Fund managers are divided on the sector's long-term prospects, but many believe that the current low ratings of banks are unlikely to be sustained in a benign economic environment.

Key Takeaways:

  • Barclays' £5.4bn bid for Woolwich sparked a rally in bank share prices, with many gaining over 5% in a single day.
  • Fund manager Neil Woodford believes that bank shares are ideal for income-seeking investors, citing Abbey National's prospective net yield of 6% and its potential for 10% annual growth.
  • Barclays' bid for Woolwich is seen as a sign of consolidation in the sector, with some analysts expecting further takeovers to push prices even higher.
  • However, others, including Tom Maxwell, director at Martin Currie fund managers, are skeptical about the possibility of further consolidation, citing regulatory hurdles and the lack of high-profile takeover targets.
  • The long-term outlook for the sector is uncertain, with concerns about the impact of aggressive internet banking newcomers such as Egg on traditional banks.
  • Thomas Rayner, a banking analyst at investment bank Dresdner Kleinwort Benson, believes that banks will continue to deliver decent earnings growth in the short term, but that the sector's ratings will drift away if managements fail to tackle long-term competition challenges.

Statistics:

  • Barclays' bid for Woolwich is worth £5.4bn.
  • The bid price is 352p a share, compared to the Woolwich issue price three years ago of 372.5p.
  • Abbey National has a prospective net yield of 6%.
  • The sector's share prices remain below their highs reached last year.
  • Egg is an aggressive internet banking newcomer that is seen as a threat to traditional banks.

Sources:

  • Barclays' £5.4bn bid for Woolwich, The Sunday Times, 1999
  • Neil Woodford, fund manager of Perpetual's UK equity income fund, quoted in The Sunday Times, 1999
  • Thomas Rayner, a banking analyst at investment bank Dresdner Kleinwort Benson, quoted in The Sunday Times, 1999
  • Tom Maxwell, director at Martin Currie fund managers, quoted in The Sunday Times, 1999