The financial services sector is a broad church, but there is more than a sprinkling of companies directly involved in lending money. This has become more pronounced as the major banks have become more selective in their lending criteria.
Close Brothers (CBG) has been busy expanding its loan book, but not, management claims, at the expense of quality. Steady economic growth is also boosting demand for car loans, while small and medium-sized companies are likely to be looking for additional finance as well.
Sub-prime lender Provident Financial (PFG), which was recently promoted to the FTSE 100 index, is also likely to see further demand for its Vanquis credit card, with delinquency levels down, thanks to a stronger economy and a recovery in wage growth. For International Personal Finance (IPF), the path has been that much more difficult, especially when Slovakia introduced a cap on interest rates charged on loans.
A lot of attention has been focused on the buy-to-let market and the imposition of higher stamp duty on secondary home purchases, as well as the tapering of mortgage interest relief. Both of these are expected to make many potential landlords think twice about entering the market, but mortgage specialist Paragon Group (PAG) may escape the worst because most of its landlord mortgagees operate as limited companies, where tax relief can still be claimed.
Companies in the interdealer broking sub sector received a makeover as ICAP (IAP) sold its voice broking business to rival Tullett Prebon (TLPR). This leaves ICAP as more of a financial technology business akin to the London Stock Exchange (LSE).
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| ALLIED MINDS | 285 | 615 | NA | 0.0 | -25.0 | Hold, 458p 28 Aug 2015 |
| CLOSE BROTHERS GROUP | 1,264 | 1,893 | 10.5 | 4.2 | -15.7 | Buy, 1,459 29 Oct 2015 |
| ICAP | 454 | 2,959 | 22.2 | 4.8 | 1.3 | Hold, 501p 12 Nov 2015 |
| IG GROUP HOLDINGS | 754 | 2,763 | 21.2 | 3.7 | 5.1 | Hold, 750p, 22 Jan 2016 |
| INTERMEDIATE CAPITAL GP. | 589 | 1,919 | 12.0 | 4.4 | 26.4 | Buy, 562.5p 17 Nov 2015 |
| INTERNATIONAL PSNL.FIN. | 244 | 539 | 6.6 | 5.1 | -42.1 | Hold, 292p 30 Dec 2015 |
| INVESTEC | 423 | 2,612 | 12.9 | 5.0 | -21.6 | Hold, 453p 15 Dec 2015 |
| IP GROUP | 181 | 1,024 | 15.0 | 0.0 | -17.8 | Hold, 214p 5 Aug 2015 |
| LONDON STOCK EX.GROUP | 2,473 | 8,615 | 50.9 | 1.2 | 8.3 | Hold, 2,615p 7 Aug 2015 |
| PARAGON GP.OF COS. | 303 | 891 | 8.5 | 3.6 | -25.9 | Buy, 393.3p 24 Nov 2015 |
| PROVIDENT FINANCIAL | 2,932 | 4,315 | 19.7 | 3.5 | 18.3 | Buy, 2,995p 28 Jul 2015 |
| TULLETT PREBON | 316 | 770 | 9.3 | 5.3 | 1.9 | Hold, 393.7p 28 Jul 2015 |
Favourites
We still like Paragon, but concede that market sentiment, which has already trimmed a quarter off the share price, may continue to exert downward pressure until the effects of increased stamp duty come into force this April. This is reflected in the rating of less than 8 times forecast earnings for the year to September 2016. We back Close Brothers over the long term, and at 11 times forecast earnings the shares currently trade at a discount to the sector average.
Outsider
3i's (III) private equity investments have shown a slower valuation uplift, while unlocking value has been made more difficult by market volatility. Given the potential storm clouds on the macroeconomic horizon, 3i may find it difficult to match last year's gross investment return of 7 per cent.
