Lloyds' share price recovery has much further to go, according to two fund managers.
‘They’re at 70p, so still have a way to go,’ he added.
Last week, Lloyds reported its highest profits since the financial crisis. The high street bank lowered its provision for payment protection insurance (PPI) claims and raised its dividend.
Over the past three months, its shares have risen by 19%. However, over one year its share price is down 6%.
‘The main thing about Lloyds is that it is very boring in a good way,’ said Davies.
‘It is just becoming a dividend machine and that will take it back to what the old Lloyds was a decade ago when big income funds had it in their top 10 holdings, before the financial crisis came along and it all went to pot.’
Davies expects Lloyds will be able to pay a dividend of 5p per share, in spite of a tough economic backdrop and low interest rates.
‘We were talking about a 5p or 6p dividend pre-Brexit and now we are still looking at that, but in a different macro world,’ he said.
‘Although we’ve not seen the back of PPI, Lloyds has become a very simple and low volatility bank now, and the other thing that we’re getting close to is the government no longer being a shareholder.’
Matthew Jennings, investment director for UK equities at Fidelity Worldwide Investments, describes Lloyds as ‘the highest quality bank in the UK market’.
‘The reasons that Lloyds is high quality is that it operates in a better market, it is consumer-focused, has a very strong balance sheet, and a management team which has showed good stewardship and consolidated it into a simple and easy-to-understand business,’ he said.
‘It is not very exciting. Historically it has been a very good business and it should have a higher multiple than it does today.’
Jennings does not share this optimism for Barclays (BARC), however. Citywire A-rated Alex Wright sold out of Barclays in his Fidelity Special Situations fund three to four months ago because the team started to lose faith in its recovery.
‘Barclays is a number of different businesses. Barclaycard is a good business, but the investment bank does not appear to be at the scale that it needs to be to operate in global investment banking, and we couldn’t get from management what it would do about it one way or the other,’ said Jennings.
Jupiter’s Davies disagrees. He expects Barclays will ‘look like a normal bank’ in a year’s time, following the sale and closure of non-core units.
Last week, Barclays reported that it had tripled profits over 2016, benefiting from cost-cutting and selling off its non-core businesses. However, the bank still faces hefty fines in the US over fraud charges relating to mortgage mis-selling in the run-up to the financial crisis.
Davies isn’t overly concerned about potential fines the bank could face in the US.
Following a recent meeting with Barclays’ chief financial officer, he said: ‘The fine [for the bank] in terms of magnitude is annoying rather than terrifying, and they would rather have it behind them than in front of them’, said Davies.
In his view, Barclays has tidied up is business and is getting back to a 9%-10% return on equity.
‘It is very easy in my thinking that it could be close to book value at £3,’ he added.
Lloyds and Barclays represent the two largest positions in the funds that Davies manages, each making up about 7% of the funds.
The recovery for banking stocks is reliant on one important factor: the direction of travel for the UK economy.
As banks are cyclical, Davies said the recovery in part relies on the UK economy remaining resilient.
However, he is not concerned about the impact of Article 50 being triggered and the broader fallout associated with the UK’s exit from the European Union.
‘The evidence I have in front of me is very resilient. We have had the shock of the vote, and that could have caused people to stop spending and stop investing and that did not happen,’ he said.
‘Currency moved sharply and we have some inflation coming through but the signs are resilient on income and employment will not shove us off a cliff.’