Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I'm Susannah Streeter, I'm the senior investment and markets analyst at Hargreaves Lansdown. And I'm here with Sarah Coles, our senior personal finance analyst.
Hi there Sarah - so this episode brings together interest rates, ethical banking and Christmas. It means we're talking gold, banking sense and more... do you see what I did there?
Sarah: Oh no that's terrible. But yes, all the talk has been about the rate rise that didn't happen, and it has all sorts of implications for banks and businesses.
Susannah: So today we're focusing on the financial sector, in an episode we're calling, 'are you banking on a rate rise?'
Sarah: Yes, Sophie Lund Yates - equity analyst here at Hargreaves Lansdown is going to take a look at a few key banks in detail, including Lloyds and HSBC. Hello Sophie.
Sophie: Hi Sarah. Yes, Lloyds is a classic UK name which we all know, but important to remember there's more to a company than its name though as we'll find out later
Susannah: And we are going to find out what it's like operating a bank in such uncertain times - with our guest on the programme today Gareth Griffiths, UK head of retail banking at Triodos Bank, in Bristol. Hello there Gareth, great to have you on the program.
Gareth: It's great to be with you, thanks for having me.
Sarah: And Emma Wall our head of investment research here at Hargreaves Lansdown is going to speak to fund manager, Andrew Jones, from Janus Henderson Investors about the prospects for global financial stocks.
Plus we'll have our quiz, and Susannah has been digging out some gems from the bank vaults.
Susannah: Yes, you are going to have to chip away fact from fiction when it comes to gold, copper and forgeries.
Sarah: But we're not just going to talk about sensible saving, because we're getting to that time of year when suddenly it's all about spending. I can't believe we're already in Black Friday sales territory.
Susannah: Yes, and the latest stats from the ONS show that we didn't wait for Black Friday this year, even at the start of November we were snapping up Christmas food and presents because of all the worries over the shortage of goods in the shops.
At the start of this month, one in eight adults said they had already bought festive items that they would ordinarily have purchased later in the year, with most common items purchased or ordered in advance being food. Consumers are also concerned that the coveted presents on Christmas lists might be hard to come by, they have been snapping up toys in advance. The buy-early strategy to avoid disappointed faces on Christmas day is likely to accelerate over the next few weeks given warnings from retailers that some popular items may be scarce on the shelves.
Sarah: This research was really interesting. Every year we get the same old warnings that must-have toys will sell out, which we've learned to take with a pinch of salt. But this year it's different. Already people are saying they've not been able to buy some of the things on their weekly shopping list, and in the previous two weeks around one in six said specific items weren't available.
Susannah: Yeah - after Christmas was cancelled last year for so many families, it seems many are desperate to avoid a scrooge-like celebration this year, so they are stocking up now, to ensure the table and tree are fully laden with treats.
And of course, all of these expectations of shortages of goods - and warnings of price rises is partly why there was so much expectation that the Bank of England would raise interest rates to put a brake on inflation during the last meeting - but it didn't quite happen like that did it.
Sarah: No - in the run up to the Monetary Policy Committee meeting, a number of members of the committee, including governor, Andrew Bailey, gave strong hints that a rate rise was on the cards. It means the markets started pricing in a rise in November.
However, when the time came, nothing materialised. There were some pretty sound reasons for putting things off. It's mainly that the bank is worried about unemployment. There were over a million people still on furlough when the scheme ended in September, and there was uncertainty around what this would mean for unemployment. So, the Bank has decided to hold off until we get a clearer picture.
Susannah: That's going to have disappointed wait and see savers - who were hanging on for better deals after a rate rise - they are now likely to be in for a far longer wait then they expect. Even when we do get a rate rise, the high street banks are highly unlikely to pass it on. anks have suffered a couple of years of horribly squeezed margins, with rock bottom rates leaving them little room to manoeuvre - so no surprise that banking shares fell back after the Bank of England sat on its hands this time round - given the long squeeze on net interest margins they have experienced - it means they're likely to see any rises as an opportunity to get a bit of breathing space, so they're unlikely to raise rates very quickly.
Sarah: Yes, all this means investors should be taking steps beyond their portfolios with their wider finances. It really is the time to start shopping around if you are a saver - in the past six months we've seen the rates on some competitive short term fixed accounts double. It means there are far better deals out there for anyone getting next to nothing from their high street bank.
Susannah: And if you have a mortgage, there could be a tendency to sit back and relax - but it's not really time to be too laid back with this area of your finances.
Sarah: No, there are around 2 million borrowers on variable rates who should consider whether it's worth fixing their rate now. Rates have already started to rise, but we're still around historic lows, so now could be the time to act. It's more difficult for those locked into variable rates with hefty fees, so you need to work out if a switch would save you money overall. However, if you're on a fixed rate with less than six months left to run, you can usually book in a new rate now, you don't have to wait for your deal to expire.
Susannah: So the Bank of England certainly pulled the rug on expectations - if you were a saver or a borrower - but just what's it been like if have you have been running a bank?
Gareth Griffiths is UK head of retail banking at Triodos Bank. Gareth thanks so much for talking to us. Tell us, what do rising interest rates mean for the banks? What's is going to mean for Triodos?
Gareth: Yeah sure. We had our interest rate preparations all ready for the last Monetary Policy Committee meeting and we're very much looking forward to the next one on the 16 December. Because as you said, the jobs market data is out this week so it's going to give us a really interesting first view as to what might happen at the Monetary Policy Committee (MPC) voting, given that only 2 members of the MPC voted for a rate increase last time around. And I'm sure, as you said, the 'wait and see' army of cash savers will be certainly welcoming any rate rise that might be forthcoming. Whilst at the same time, mortgage borrowing rates have already increased and we're seeing that people on variable rates, some of them starting to really take action. I think that there are a couple of points that you pulled out which were really interesting there. One, is that I'm already seeing banks increasing their mortgage rates now, ahead of the rate rise as the market prices-in increased swap rates. And ultimately, that is banks taking their net interest margin and making sure that the last few months of the year are going to be more comfortable. At Triodos, we certainly made preparations to pass on rates to customers in an orderly fashion and I guess the call-out I would make to the rest of the industry is how quickly that's going to be done by them, because a month or six weeks worth of sitting on the increased interest rate for banks is only upside for them. We would really always encourage people to not only look at the rate, but what's behind the rate. Customers are really wanting to use their money more sustainably.
Susannah: For your customers, it's not just about the rate though is it, it's about the whole ethos of the bank. Are ethical concerns increasingly important to consumers now?
Gareth: Yeah, you're absolutely right. Our customer-base grew 20% in 2020 which is a really exciting tick in the box which says that moving your money is probably one of the most powerful choices that you can make. It can really drive measurable change, both positive social and environmental change. The challenge I think we're now starting to see in the marketplace is that there's lots of different options which are labelled 'ethical' or 'sustainable' and it's often I think really difficult for customers to sift through the different options and work out what's actually going to deliver the impact people are hoping for and what's just greenwash. And I think we need to be careful as an industry, financial services has got a real obligation to our customers to really actually make a difference. Ultimately, this term 'ESG': Environmental, Social, and Governance, can be very easily used as a mis-selling tactic so I'd really urge consumers to look at what really sits behind the fund and the interest rate.
Sarah: Do you think it would be helpful if the FCA came out with a definition of what 'ethical saving' actually is?
Gareth: Yeah, I think that's important. Ultimately there is an EU taxonomy on investments, and as soon as we get nearer to the net-zero transition I would implore the regulator and also the industry itself to uphold the highest level of ethical labelling standards. I mean if you just look a little bit behind things like the UN sustainable development goals, I'd really encourage the industry also to orientate, say investment portfolios towards the UN sustainable development goals. So, there's a real clear linkage for consumers as to where their money is going in a transparent way.
Sarah: There have been a number of sustainable product launches, including NS&I's green bond, is this helpful for building awareness?
Gareth: It's a positive step that more green savings are being offered now and I think it's raising the overall consumer awareness. However, I think my disappointment is that the rate in question on the NS&I bond, there's nothing to dispel the myth that you actually have to pay to be ethical in the rate. It's simply not true. When I think back to last year during the height of the pandemic, we saw ethical and sustainable funds outperforming their competitors and the benchmark. The point you raised I think is absolutely the most important one, in that it's imperative that there's a transparent criteria on what is actually considered green. I think that's the only way forward to make sure consumers have a valid transparent choice. And I think therefore that having a taxonomy in place to unlock the kind of potential of green and ethical savings and investments is really important.
Sarah: One of the things we know through our research is how difficult it is to persuade people to switch their savings. Is that a challenge for you?
Gareth: It is and I think there's still the impending question of, you know, 'But I can get a really good headline rate for one year and ultimately I don't know the bank, I don't know where that money is going' and that's quite a significant part of the Triodos mission and ethos is about, is that all of our savers can see where every penny of their money is going. As we come off the back of COP26, which has been a real moment in time, we know that consumers are wanting to use their money to make a real difference in the world. But however, clearly the headline rate in a low interest rate environment where rates have been depressed for so long is quite a powerful motivator for many. But I think as we build a net-zero transition and really transition our economy to net zero, you know, I was really heartened the other day with Rishi Sunak's announcements that all financial institutions and listed companies are going to have to publish all of the plans that they've got to transition to net zero. And we are therefore going to see underneath the bonnet of quite a lot of banks and what they continue to finance and why they are able to therefore pay those top rates. It's going to be a really interesting next couple of years.
Susannah: Gareth, doesn't all of this show that in terms of finance as well, it's much more difficult for poorer people to be green. Those people who are wealthy can afford to pay for a current account at Triodos but a lot of people are struggling right now. Have you got plans to widen your customer base to those people as well?
Gareth: I think that's a really interesting question around what I'd actually call the 'poverty premium', which I think is much less associated with example the £3 per month we charge for a current account but stems much further. And, if I think about 2 things, firstly overdraft rates and we now see the most predominant overdraft rate on current accounts up at around 39.9%. And that was after a piece of regulation was passed around the high cost of credit and banks being more transparent in the way that they charge rates and charge for overdraft usage. And the poverty premium extends itself one step further, in that people with basic bank accounts, poor credit, etc. May not be able to get access to accounts where they've got access to standing orders and direct debits, and that increases the poverty premium even further because clearly then people can't pay even the very basics through a standing order or direct debit. So again, I'd really encourage people to look a bit further, understand how they use their products and what might actually benefit them. There's lots of advice on the internet (Ethical Consumer, Which) and just take that research maybe one step further because headline rate isn't everything.
Sarah: Increasingly we're asking people to look a bit deeper into their finances and do the maths on things like overdraft rate and current account charge, and then look a bit deeper into where that bank is invested. And I'd be interested to know, do you think that that's a mass market - do you think that people have the time and the energy for that sort of thing across the board or do you think that that's something that's got to grow over time?
Gareth: I think we've to make it easier, actually I think we've got to make it much easier. If I look at the raft of consumer websites out there, I think they take one big step to make it easier for customers. I really do think that there's probably quite a lot of complexity and detail that could be made easier for customers, but I think as an industry it's one of the things we can help consumers with and be much more transparent and comparable.
Susannah: OK Gareth, thank you so much for being with us on Switch Your Money On, it's been really interesting talking to you.
I want to bring in Sophie Lund-Yates now who's a Senior Equity Analyst at Hargreaves Lansdown. Sophie, really interesting to hear what Gareth has been talking about with rate rises and transparency within the banking industry, Tell me some of the stocks that you've been looking at where there have been similar issues being faced.
Sophie: Hi Susannah, so yes, obviously we have these bigger trends that are affecting all of the banks one way or another but that doesn't mean that all of the stories are the same. But starting with something that all the listed banks do have in common, they've all had results relatively recently, so there are a couple of common factors where the UK's banks are concerned. First one being, that they assumed the absolute worst when the pandemic hit, that meant they put aside enormous sums of money as provisions because they were concerned people wouldn't be able to pay their debts, essentially. But actually what's happened is that the macro-economic outlook is actually a lot better than feared, so the banks have been able to release large chunks of those provisions, which has hugely boosted profits. Which is great, you know they're all on sort of better footing than maybe they had feared would be the case. But injections to profit like this are short-term and it's important to focus on the differences between the banking giants and their longer-run investment cases.
So, I'll starting with Lloyds. Everyone knows Lloyds, it's a high street staple which is actually one of the interesting parts of it, it's one of the largest UK branch presences and also it's got less of a fee-based investment banking income. So what I mean by that is some of the other listed names earn money form big investment bank arms, so they earn money from advising on IPOs and trading commission, stuff like that. Lloyds has a lot less of that, so that does mean that the low interest rate environment that we're in at the moment and the lack of a rise is even more important, because while rates are on the floor it limits the profitability of its loans, and Lloyds is a lot more exposed to traditional lending than the other banks.
The flipside of that is it means the increasing likelihood of a rate increase would be even better news for Lloyds than some rivals who have a more varied source of income. At time of recording there hasn't been any announcement of a rate increase.
For Lloyds, the main thing I'll be watching over the coming year is how it handles its vast estate. So, there's one thing to say that being one of the last men standing on the high street is it benefits from rivals closing, or will it need to further accelerate its digital strategy?
Susannah: Yes, that will be really interesting to watch how that plays out, but what about banks that have got less of a UK focus?
Sophie: It would be remiss not to talk about HSBC, which is the UK's biggest listed bank. The majority of its income comes from Asia though, which means the fortunes of HSBC, and therefore a reasonable chunk of the FTSE, are largely tied to foreign shores, which I think is something that sometimes get forgotten sentiment-wise when we're talking about the banking giants. At the moment, the Asian business is actually lagging other areas, so HSBC is picking up the slack from other regions, but those are the regions it has been planning to shrink. It hasn't faltered in its plans to shrink other areas and focus even more on Asian economies in the longer-term though, which is a dynamic I'm watching quite closely.
The other bank to talk about is Barclays. To a lot of people, Barclays brings up images of being a traditional high street staple, maybe a bit like Lloyds, but it actually has an enormous investment bank too. It makes a lot of its money from things like fees when it advises companies on IPOs for example, or commission from big corporate deals. A lot of people don't actually realise Barclays was in the running for buying out Lehman Brothers before it collapsed right at the start of the financial crisis. So, just to give you an idea, it's really a massive global name, not just kind of a frequenter of the UK high street. Having those extra sources of income are really helpful when interest rates are so low. The biggest hurdle to clear now is how quickly and how well the new CEO settles in after the unexpected departure of Jes Staley a couple of weeks ago.
Susannah: Yes, reall interesting to see how that plays out. Sophie many thanks for all of your analysis there.
Now we can hear from Emma Wall our head of investment research here at Hargreaves Lansdown - she's been talking to Andrew Jones, who's a Portfolio Manager from Janus Henderson Investors.
Emma: Hi Andy
Andy: Hi Emma, it's good to talk to you today.
Emma: You too. And we're talking about banks. Now historically banks have been quite good dividend payers. You of course run an income fund, a responsible income fund no less. You have a couple of banks in the portfolio. Last year was not so great for dividends and banks because the regulator encouraged them to cut the dividend, given the stressed economic backdrop of the lockdown. But dividends are returning, aren't they, so perhaps you could give us a bit more detail about the couple of banks in the portfolio.
Andy: That's absolutely right yeah. Obviously 2020 was an incredibly difficult time for the UK market from an income point of view overall. And particularly banks did have to spend their dividends last year. The regulator was very, understandably cautious about the effects of the pandemic. But as the year went on and the effects turned out to be not quite as serious as first feared, at the end of the year it did give the banks permission to start paying dividends again. So, what we've seen this year, is a relatively modest return to dividends from UK banks. But going forwards we would expect to see greater dividends. The stocks that I hold in the portfolio in the sector, Lloyds and Natwest, we think they've got very strong capital positions, which with that improving profitability we'd expect to see, means they're well placed to increase dividends going forward. And we think they're going to be offering yields of around 4.5-5% next year.
Emma: What about the broader sector then, because financial services is not just banks, not just high street domestic banks that you have in the portfolio but it's quite a wide-ranging sector isn't it. What else are other ways to play this and how does that feed into the better economic backdrop we are seeing going into 2022.
Andy: Obviously banks are an important sector for the UK, but we do have a very large insurance sector, and very viable financial services sector. So, one company we own in the insurance sector is Aviva, which has got a relatively new Chief Executive who has taken a long overdue restructuring of the company. So, since she's been in charge, she's exited a significant number of businesses, both in Europe and in Asia, focussing on where they're very strong, which are the core markets of the UK, Ireland and Canada. And generally, economic growth is quite good for insurers, so what we think will happen is that with this improved focus, they'll be able to improve the returns they have. And the great thing about them having sold the businesses overseas is, like Lloyds and Natwest, they've got a really strong capital position so dividends there will pick up next year as well. So, it's a really good restructuring story with a favourable backdrop and dividends to resume there as well.
Emma: Now the adage goes that equity investors are perpetually optimistic and fixed income investors are perpetually pessimistic, but I do feel perhaps we should add a bit of balance because you've just spoken there about 3 companies for whom the outlook looks more positive because the economic backdrop looks positive, but it's not smooth sailing for the financial services sector is it, because it's a not a done deal that the economy is going to grow next year and indeed, inflation could have a big impact on that.
Andy: That's absolutely right. Obviously, these are quite macro-sensitive stocks, so what we always try and do in the portfolio is try and have a balance so you're not just beholden to macroeconomic forces. So, Aviva's a good example, we think that they can do well even if things don't pan out in a favourable way economically. And similarly, we also own 3i Group in the portfolio which is an incredibly well-positioned private equity and infrastructure business. And we think that whatever the inflation outcome for the 3i, they've positioned themselves so well to strategically advantaged sectors such as a discount retailer, healthcare and technology, we'll think they'll be able to carry on growing even in a more difficult environment. So, we think it's important with the potential for interest rates to pick up to have some banks in the portfolio, but we also want other drivers of companies as well, which is why we've got restructuring with Aviva and then also better structural growth with 3i Group.
Emma: And Andy, finally, you are the manager of an responsible investment mandate, which means there are environmental, social and governance considerations woven into your investment process. How do you marry that process, that mandate and that passion with investing in financial services, which for some people is a bit of a sin sector?
Andy: The fortunate thing about the companies we invest in is a lot of them have actually been thinking about responsible investing for a long time. A company like 3i has a very long standing in the responsible investment sector and it's one of the reasons they've delivered such strong growth. So, they've been avoiding a lot of difficult sectors overall. A lot of the companies we own in that area have actually been thinking about it in a similar to how we would think about it. And whilst banks historically have had a lot of issues overall, we do think that the ones we own are moving in the right direction. I takes time to work through the legacy issues because they're big, complex organisations but we think we're owning ones that are definitely going in the right direction and have a very useful part to play in society and are definitely better-placed businesses than they have been historically.
Susannah: Emma Wall with Andrew Jones, a Portfolio Manager from Janus Henderson Investors. And we do need to mention that yields are variable and any dividends or growth aren't guaranteed. You're listening to Switch your money on from Hargreaves Lansdown
Sarah: And finally, it's time for the quiz
Susannah: Yes, I've been swotting up top Bank of England facts, including some of the weirder tales from the vaults, some of which are maddeningly difficult.
So to start us off, which coins are made of copper?
Sarah: Well, you've said they're maddeningly difficult, so this seems too easy, but why not... I'll say 1p and 2p.
Susannah: Well, only very slightly. They did used to be made mainly of copper, but now they're coated in a tiny fraction of copper, and the rest is steel. It means they actually have less copper in them than the 20p, which is nicely confusing.
Now, delving back into the vaults, the Bank of England issued war bonds in 1914 to help fund the First World War. They were claimed to be a runaway success, but what did the Bank of England recently admit about the first sale?
Sarah: I've no idea... No I've got nothing... Was it all a sham?
Susannah: Well not exactly, but it was a disaster. People didn't buy anywhere near enough of them, but they didn't want to admit it for fear of destroying the market, so they got the Chief Cashier and his deputy to use Bank funds to buy the rest of the bonds in their own name, and rather than admitting it on the balance sheet, it listed the holdings as 'other securities', so the Bank's researchers only dug this fact out very recently.
Now, how many bars of gold does the Bank of England own?
Sarah: Well I know they own 1, because it's in the Bank of England museum, and at least before Covid you could pick it up. There's something strange about being able to pick something up that's worth more than your house. But beyond that I couldn't even hazard a guess.
Susannah: Well you're not far off, they actually own 2, and both of them are in its museum. They hold 400,000 others on behalf of the Treasury and other organisations, but they don't own them
And finally, between 1797 and 1821 a shortage of gold coins meant the Bank issued low denomination notes for the first time. There was a boom in forgery, but why were forgers so successful?
Sarah: These are really difficult questions. Were they really easy to copy? I suppose without holograms it might have been easier.
Susannah: Certainly, they didn't have the same anti-forgery protections as modern notes, but in this case, it was because the people receiving the notes had never seen them before, so had nothing to compare them to. Lots of them didn't read either, so weren't able to spot mistakes. It was such a problem, that during this people over 300 people were hanged for forgery, which was a pretty grisly period in the Bank's history.
Sarah: That was your hardest quiz so far. I think next time I'm going to have to set the questions and get my revenge.
I'm off to dig out some hideously obscure facts. But before we go, we need to remind you that this was recorded on 15 November, and all information was true at the time of recording.
Sarah: Nothing in this podcast is personal advice - you should seek advice if you're not sure what's right for you. Investments rise and fall in value, so you could get back less than you invest.
Susannah: Yes, this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah: And this hasn't been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information. So, all that's left is for me to thank our guests, Gareth, Sophie, Emma and Andrew, and our producer Elizabeth Hotson.
Susannah: Thank you so much for listening. We'll be back again soon - so if you enjoyed this podcast please do let us know what you think and do subscribe wherever you get your podcasts, so you get a fresh new episode in your inbox as soon as it's ready. Goodbye.
