1. UK Financial Services Industry Landscape

The Financial Services sector has been the backbone of the UK economy. Moreover, it is comprised of a diverse range of firms such as banks, investment banks, hedge funds, asset management and financial services companies. Furthermore, they play a vital role in mobilization, payment, saving, credit, and availability of funds. The sector ensures the movement of money and capital in the economic cycle. The industry saw a relatively small decline in economic output due to the pandemic compared to other sectors of the economy. The industry has been facing margin pressure as clients allocate and seek towards cheaper products and seeking to renegotiate fees. Moreover, the asset management firms have been slower than other financial services sub sectors to adopt technological advancements.

Key Trends in the Financial Services Sector

Risk Exposures to the Financial Services Sector 

• Regulatory Risk: Changes in government policy, law, and capital requirements significantly impact the financial industry. Any failure to comply with regulatory requirements may incur additional costs and penalties.
• Macro-economic Uncertainties: Volatility resulting from the current COVID-19 shambles, Brexit, and US-China tensions can considerably influence asset, liability, stock, and credit market pricing.
• 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 last one-year performance, the FTSE All-Share Financials index has outperformed the FTSE 250 index but slightly underperformed the FTSE 100 index. The FTSE All-Share Financials index, generated a return of about 11.41%; however, the FTSE 100 produced a return of around 12.62%, and FTSE 250 developed a return of approximately 2.02%

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Financial Services Sector Outlook

According to the International Monetary Fund, the UK economy is expected to witness a growth of around 4.7% in 2022 and approximately 2.1% in 2023. The record annual consumer price inflation in the UK during January 2022 released on 16 February 2022 has triggered the hopes of a further interest rate hike. Moreover, the Bank of England already increased the interest rate twice in the last three months. The Federal Reserve would most probably make a first interest rate hike in March 2022. The profitability of the banking sector would increase with interest rate hikes. In a nutshell, the institutions in the banking sector, such as retail banks, commercial banks, investment banks, insurance companies, and brokerages, are going to benefit from it.

2. Investment analysis and stocks under discussion (SDRC, XPS, and ARBB)

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

A. Schroders PLC (LON: SDRC)

(Recommendation: Buy, Potential Upside: 13.14%, Market Capitalization: GBP 1.15 billion)

Schroders PLC (LON: SDRC) is an international asset manager. It provides advisory and consultancy services to high-net-worth clients, financial institutions, large corporations, and other institutions.

The Company will announce FY21 financial results on 3 March 2022.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                                    

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. The 14-days RSI of ~32.09 confirms an oversold position.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 13.14% over the current price of GBX 2,030.00 (as of 16 February 2022 at 10:18 AM GMT).

B. XPS Pensions Group PLC (LON: XPS)

(Recommendation: Speculative Buy, Potential Upside: 16.04%, Market Capitalization: GBP 279.52 million)

XPS Pensions Group PLC (LON: XPS) is an FTSE All-Share pension consultancy specializing in actuarial, covenant, investment, and administration services.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~40.64) is inching towards an oversold zone and suggesting a correction in the stock price. Moreover, the stock price is approaching the lower Bollinger band, reflecting a bullish price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.04% over the current price of GBX 134.00 (as on 16 February 2022 at 08:10 AM GMT).

C. Arbuthnot Banking Group PLC (LON: ARBB)

(Recommendation: Watch, Potential Downside: 18.70%, Market Capitalization: GBP 141.23 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 between the upper Bollinger band and the middle Bollinger band, indicating an correction in the stock price. Furthermore, the 14-days RSI of ~64.98 approaches overbought territory.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 18.70% over the closing price of GBX 940.00 (as of 15 February 2022).

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

Note 2: Investment decision should be made depending on the investors’ appetite on 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 subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which 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. 

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 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 unfavorable movement in the stock prices.

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