Record RBS profit shores up banks

Dresdner RCM Income Growth investment trust manager Nigel Lanning is confident in the banking sector following updates from a number of big names last week.
Royal Bank of Scotland unveiled the largest full-year profit ever made by a UK bank when it published results along with Bradford & Bingley, Standard Chartered and Alliance & Leicester. This week Abbey National and HBOS are also due to report.
But Lanning says the important news is already known: “Usually, you find at this stage of the reporting cycle that the trends are established. RBS is something of a bellwether for the sector and its results cleared up a number of uncertainties.”
Indeed, the banking sector as a whole rose when RBS reported its £6.2bn profit last Thursday. And strength in this area of the market helped the FTSE 100 record its best one-day gain since early October. RBS gained 5.8% in the day, while HBOS increased 3.6% and Abbey National climbed 3.3%.
Lanning says the fear of bad debts in the sector dispelled when RBS revealed that credit quality was strong. Currently, the portfolio is 6% overweight banks relative to his FTSE All-Share index benchmark, with a 26% stake versus 20% in the index. He says banks could be in trouble if the economy were to sour, but adds that this is unlikely: “However, if it did occur and bad debts were to rise because of unemployment, that would have an impact on profits.”
Despite his positive outlook, Lanning has a neutral position in HSBC – the world’s second-largest bank. BWD UK Blue Chip Growth fund manager Colin Morton is less keen on HSBC. He says the stock is overvalued and is 2% underweight the sector relative to his FTSE 100 benchmark index, with 22% in banks versus an index weighting of 24%.
On the banking sector overall, Morton says: “The prices are reasonable, so I am quite relaxed about owning them at these sort of levels.” However, he is more apprehensive about the future than Lanning.
Morton, who says he would be prepared to go 2% overweight the sector if he liked the banks “a lot”, has doubts: “If something comes out of the woodwork, the worrying thing for the banks is the amount of debt outstanding.”