1. UK Financial Industry Landscape

The financial sector has been the backbone of the UK economy, comprised of banks, insurance, asset management and financial services companies. Moreover, the financial services sector contributed £164.8 billion to the UK economy during 2020, representing around 8.6% of the total economic output. Furthermore, the industry generates 50% of its output from London. Considering the proportion of national economic output, the UK financial services sector remained the third largest in the OECD in 2020. The UK financial services accounted for a trade surplus of £46 billion for 2020. Meanwhile, 35% of financial services exports went to the EU, and 31% of financial services imports came from the EU.

FinTech contributes nearly £6.6 billion to the UK economy every year, while the financial services sector gives employment to around 2.3 million people in the UK. Moreover, there are around 428 foreign companies quoted on the London Stock Exchange, making it the second-largest exchange in the world. Adjacently, the UK banking sector holds approximately USD 10.8 trillion of assets.

Key Trends in the Financial Sector

Risk Exposures to the Financial Sector 

• UK GDP: The UK economy witnessed a slowdown as the GDP grew just 0.1% during October 2021.
• Regulatory Risk: Financial sector is largely exposed to change in the government’s policy, legislation, and capital requirement. Any lack of meeting the regulatory requirement can result in additional costs and penalties.
• Macro-economic Uncertainties: The volatility arising from the prevailing COVID-19 mayhem, Brexit and US-China tension can significantly impact the market prices of assets, liabilities, equity, and credit markets.
• Housing Market Boom: Any significant correction in house price would negatively impact the wealth and reduce investments in the market.

SWOT Analysis

Benchmark Index Performance

Based on the one-year performance, the FTSE All-Share Financials index has outperformed the FTSE 100 index and the FTSE 250 index. The FTSE All-Share Financials index generated a return of about 16.30%; however, the FTSE 100 produced a return of around 10.52%, and FTSE 250 generated a return of around 14.10%

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Financial Sector Outlook

According to the leading industry expert, the global financial services market size is expected to grow from USD 20.4 trillion in 2020 to USD 22.5 trillion in 2021 at a compound annual growth rate (CAGR) of 9.9%. In addition, the financial services market is further expected to grow at a CAGR of 6.6% and breach USD 28.5 trillion by 2025. The financial services sector saw a relatively small decline in economic output in 2020 due to the pandemic compared to other sectors of the economy. The record annual consumer price inflation in the US during November 2021 released last Friday had triggered the hopes of a rise in interest rate as the Federal Reserve had expected to accelerate the asset tapering. Moreover, key central banks like the Bank of England, European Central Bank and Bank of Japan will also make policy decisions later in the week. However, the Omicron variant has dented GDP growth forecasts for Q1 2022 if it proves more transmissible than Delta. Nonetheless, the industry remained track for growth supported by technological advancements and improved global economic scenario.

2. Investment analysis and stocks under discussion (IGG, ARBB, LLOY)

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

 A. IG Group Holdings PLC (LON: IGG)

(Recommendation: Buy, Potential Upside: 15.23%, Market Capitalization: GBP 3.39 billion)

IG Group Holdings PLC (LON: IGG) is an FTSE 250 index listed financial technology entity that operates as a global leader in online trading. It has a presence in North America, Europe, Asia-Pacific, Africa, and the Middle East.

IGG had paid a final dividend of 30.24 pence per share on 21 October 2021, while the ex-dividend date was 23 September 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                     

From a technical standpoint, the stock is hovering above the 20-days exponential moving average of GBX 783.3, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.23% over the closing price of GBX 785.50 (as of 14 December 2021).

B. Arbuthnot Banking Group PLC (LON: ARBB)

(Recommendation: Speculative Buy, Potential Upside: 14.43%, Market Capitalization: GBP 122.46 million)

Arbuthnot Banking Group is an FTSE AIM All-Share index listed private bank based near Moorgate in the City of London.

One Year Share Price Chart

(Source: Refinitiv; Analysis done by Kalkine Group)

From a technical standpoint, the stock price is trading around the lower Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.43% over the closing price of GBX 822.50 (as on 14 December 2021).

C.Lloyds Banking Group PLC (LON: LLOY)

(Recommendation: Watch, Potential Downside: 25.93%, Market Capitalization: GBP 32.09 billion)

Lloyds Banking Group PLC (LON: LLOY) is an FTSE 100 index listed Banking Company, which is engaged in the business of financial and banking services.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line remained lower than the signal line, and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 25.93% over the closing price of GBX 45.19 (as on 14 December 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.                                                      

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 15 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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