This report is an updated version of the report published on 15 June 2022 at 08:48 AM GMT+1

1. UK Banking & Financial Sector Landscape

The UK Financial sector has a reputation for the quality of oversight and the design of the financial stability framework set up after the 2007-09 Global Financial Crisis (GFC). The banking sector in the United Kingdom consists of a number of private UK banks and international banks. There has been a steady growth of online and mobile banking in the country; however, physical banking remains popular. The Bank of England is the central bank in the United Kingdom and has been state-owned since 1946. Further, banks in the region are regulated by the Financial Conduct Authority (FCA). Some of the popular banks in the region include Barclays, HSBC, Lloyds Banking Group, etc.

Key Trends in the Banking & Financial Sector

Risk Exposures to Banking & Financial Sector 

• Brexit Impact: The UK serves as the hub of financial institutions and banks in the entire EU region, and the exact economic repercussions of Brexit in Europe and the UK are yet to be ascertained. This can lead to lower risk appetite and a squeeze in business investment.
• Macro Risk: The Bank of England is considering hike in interest rates to combat inflation. While higher interest rates are expected to be positive in banks’ net interest income in the short term, it may weigh on banks’ net worth in the medium term.
• Credit Risk: The UK has witnessed inflation at 40 year high of 9% in April 2022. This has elevated the cost of living expenses and might put stress on the borrowers for the repayment of loans, thereby driving default in the sector.

SWOT Analysis

Banking & Financial Sector Outlook

The UK is facing a sharp squeeze on disposable incomes, coupled with risks of COVID-19 and geopolitical tensions which is expected to keep the economy volatile in 2022. With high inflation levels and energy bills, the Bank of England is expected to hike interest rates and is anticipated to increase its base rate from 1% to 1.25% in its next monetary policy meet. The central bank and other regulatory bodies have an important role to play in ensuring a healthy economic outlook, amid an increase in interest rates. 

2. Investment analysis and stocks under discussion (BPT and VMUK)

After gaining insights into the Banking & Financial sector, we would look at the business model of two players listed on the London Stock Exchange.

A. Bridgepoint Group PLC (LON: BPT)

(Recommendation: Buy, Potential Upside: 16.56%, Market Capitalization: GBP 2.09 billion)

Bridgepoint Group PLC is an FTSE 250 listed international alternative asset fund management group, with offices in Europe, US and China.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group) 

From a technical standpoint, the stock is trading close to the Lower Bollinger band with low 14-day RSI level at ~32.82, reflecting an oversold stance and a possibility of reversal in the near term.  

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.56% over the closing price of GBX 250.60 (as of 14 June 2022). 

B. Virgin Money UK PLC (LON: VMUK)

(Recommendation: Buy, Potential Upside: 16.34%, Market Capitalization: GBP 1.91 billion)

Virgin Money UK PLC (LON: VMUK) is an FTSE 250 listed digital banking company.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering near to its lower Bollinger band with low 14-day RSI level of ~25.20, reflecting an oversold stance.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.34% over the closing price of GBX 131.10 (as of 14 June 2022).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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