£4bn manager: buy banks in market slump

Buy bank shares if you think the stock market is going to tumble, a leading investor has said.

Alex Wright (below), who oversees £4bn for clients of fund group Fidelity, thinks fears surrounding banks stemming from the 2008 financial crisis “loom very large”, but are misguided. In two of the most likely scenarios that could cause the next crash – rising interest rates and an economic downturn – he believes banks would fare well.

He said banks have low debt and large cash reserves, compared to the last crisis, and many bank shares are already trading cheaply compared to the rest of the market: “A gentle rise in interest rates would be very helpful for the banking industry, allowing profit margins and earnings to rise.”

In its results this week, Lloyds posted its biggest half-year profit in eight years, although it was below market expectations. If a market correction was caused by an economic slowdown or recession, Mr Wright said banks currently have a “very low level of risk compared to history”. He said: “There is much, much less leverage in the banking system today than during the last crash. “In some cases, banks now appear to be over-capitalised, meaning regulators are allowing them to distribute profits and excess cash to shareholders. This should support dividends and share buy-backs for some time to come, creating a degree of protection if markets were to fall.” One apparent threat to banks is the rapid rise in consumer borrowing, which the Bank of England voiced concerns about this week. There is particular worry about car loans, but Mr Wright said this is not debt banks are involved with. However, personal loans, credit card debt and riskier mortgage lending are all coming under scrutiny.