Banking on a recovery

Susannah Streeter: Hello and welcome to the Switch Your Money On podcast from Hargreaves Lansdown. I am Susannah Streeter, the senior investment and markets analyst at HL and as usual I am with Sarah Coles, our senior personal finance analyst. And, Sarah, I think whether your January was dry, wet or just really cold, it does finally appear to be in the rear-view mirror doesn’t it, with some tiny hints of spring on the way. It’s that time of year when I am actually pleased I did take ten minutes to shove a few bulbs in, and I do mean ten minutes, that bag of bulbs was sitting glaring at me for months in the autumn before I finally got round to it. Monty Don or Charlie Dimmock I am not. But now those green shoots do make me feel more optimistic of brighter days ahead.

Sarah Coles: I’m very impressed with your gardening prowess. I have to say I’m definitely more of a buy a ready-made pot kind of person than a seed fan. But it does seem as though it’s going to take some time before the economy emerges from the freeze, given that interest rates are still on the up, and business activity fell at the fastest rate for two years in January. Companies blamed interest rates, falling consumer confidence and strikes for the slowdown.

Susannah Streeter: Yes, it seems plenty of businesses are skating on some pretty thin ice at the moment, with the most recent Bank of England’s financial stability report showing that a number of businesses are struggling with cash flow, have weak profits and pretty hefty loans.

Sarah: And the HL Savings and Resilience Barometer shows that one in five of us are getting into deeper debt than we were this time last year, and of course the housing market is starting to wobble like jelly on a plate

Susannah Streeter: At the same time though expectations for the year ahead improved in January from a low in October. After inflation started to come down and hopes are rising about the global economic picture. So, what does all this mean for the financial institutions who are in the business of lending us money or getting us to invest in savings or bonds. Well that’s what we are going to focus on this podcast in an episode we’re calling Banking on a Recovery.

Sarah Coles: We’ve got the boss of NS&I on the podcast today, that’s National Savings and Investments, which is backed by the UK Treasury. We’ll be talking all things bonds, from premium bond to green bonds, and here to unpick what’s going on is the boss himself Ian Ackerley. Hi Ian. How are you?

Ian Ackerley: Hi Sarah, I’m delighted to be with you today! Really pleased to be able to talk to you and to talk to the listeners of your podcast.

Sarah Coles: That’s great. We’ll look forward to finding much more about that later in the podcast. Plus, Sophie Lund-Yates, our lead equity analyst, will be here to give us the lowdown of the challenges and opportunities facing some of the biggest banking names in the business.

Susannah Streeter: And we’ll also be unpicking how banks fit into sustainable investment strategies with our ESG expert Laura Hoy, who’s with us now.

Laura Hoy: Yeah, absolutely there’s a lot to consider for the banking sector and we’ll be looking into some of those concerns.

Sarah Coles: And as usual Emma Wall, our head of investment analysis and research will be here. She’ll be chatting to Nick Shenton, Artemis Income fund manager at Artemis Fund Managers. Plus listen on to find out why your pennies stretch further in McDonalds in the UK than they do in the US.

Susannah Streeter: And it’s not because you get more chicken nuggets, but listen on anyway. And we’re going, at first, dig a bit deeper into what’s been going on with our pennies and pounds, savings accounts and mortgages by delving into the banking sector. It seems the cost-of-living crisis is encouraging a surge in current account switching. Lured by the offer of cash bonuses, insurance deals, or bigger overdrafts, a record number of people switched accounts between October and December. More account holders moved their custom to a different bank in the final three months of last year than any other quarter since the seven-day switching service, known as CASS, launched in 2013. A £200 cash bonus is certainly an incentive when other household costs are rising so dramatically.

Sarah Coles: Yes, just over 370,000 people switched current accounts in the final quarter of last year, but that still represents just a tiny drop in the ocean when you look at how many current accounts there are open in the UK. That’s more than 75 million last year according to Mintel.

Susannah Streeter: Other CASS data shows that the beneficiaries of this switching surge are Santander, HSBC and challenger banks Monzo and Starling. But still, it seems traditional banks are continuing to dominate the market. The top six banking groups and providers hold a whopping 87% share of the UK current account market.

Sarah Coles: Yes, and people still seem particularly hesitant to switch their savings accounts too to get a better deal. Even though interest rates have been rising, savings rates on offer have lagged, but they have been catching up. Yet people either seem too busy or too worried about moving their money pots.

It looks like savings rates may have peaked as they’ve been coming down ever so slightly, partly because the Bank of England’s rate hikes are expected to stop once the benchmark rate hits around 4.5%, so it could be timely to consider switching before they fall further. But it is always worthwhile to shop around different providers for better savings rates, even after the marketplace has reached the peak.

Susannah Streeter: And the big banks haven’t had to work as hard to attract our money as they already have some pretty hefty buffers. It means that as the base rate has gone up net interest margins, the difference between the rate banks offer on all sorts of loans and savings rates, what it has to pay out, has been widening and that’s been good for profit.

Sarah Coles: But interest rates are rising to squeeze demand out of the economy and lower inflation, but that is expected to push the UK into recession, although it’s expected to be milder than previously feared. This raises the spectre of loans going bad. In the Bank of England’s most recent report into financial stability, it flagged that households were being squeezed by the cost-of-living crisis and rising mortgage payments, though underlined that they aren’t as vulnerable as during the great financial crisis of 2007-2008. And as yet, widespread signs of financial difficulty among UK households with debt haven’t emerged.

Susannah Streeter: Yes, it’s a similar picture on the corporate landscape, with lots of businesses entering this pretty stressful period in quite a resilient position, even though there will be pockets of companies with low liquidity, weak profitability or who have borrowed significant amounts.

Sarah Coles: So, what impact does the current economic climate and our spending and investment habits have on NS&I, National Savings and Investments, which is backed by the UK Treasury? Well, Ian Ackerley is with us. He’s the head of NS&I, so he’s the person to ask. So, Ian, I suppose the most well known of your products might be the premium bonds and we’ve seen some real rises in the prize fund recently. Can you explain some of the thinking behind this?

Ian Ackerley: Yes, you’re right. Uh, we're probably our most famous for our premium bonds and it's a product that's been around for over 65 years. And we've actually increased the prize fund rate on that four times in the last year. And it's currently at approximately 3.15%, which is the highest it's ever been for the last 14 years and actually triple where it was in May, 2022. It just reflects the fact that interest rates overall have been rising in the savings market on the back of the Bank of England increasing base rate.

Sarah Coles: The odds of a win itself haven't changed have they? Because you've changed the way the prizes are sort of structured in terms of the smaller prizes and the bigger ones. Can you talk me through that?

Ian Ackerley: We've kept the odds of winning at 24,000 to one when we recently increased the prize fund rate. But what we have done is increased the number of prizes worth £50 to £100,000. And that's really an important move and it's a lot about just giving people bigger prizes and I think sort of reflects the fact that people love to win on premium bonds, but they love to win big even more. And so this is very much around giving people that opportunity to have a bigger prize when they do win, sometimes we'll increase the odds. Sometimes we won't. At the moment, as I say, we've gone for more bigger prizes, and I think those have been paid out in February and we paid out 75% more prizes in the £50 to £100 bracket than we've had before. So that's a really, really big increase. And prizes between £5,000 to £100,000 pounds, you know, are more than triple since January.

Sarah Coles: And has inflation kind of played a part in your thinking there that maybe the £25 prize isn't what it used to be, and people are more attracted by that £50 and £100.

Ian Ackerley: I think it has been a case that people love winning prizes, as I say, whenever they can. But certainly, with rising inflation, increasing the number of larger prizes we have helps with the idea that it is something special. It's a real win for people.

Sarah Coles: So, I suppose if we take a bit of a step back then I think some people see it as a bit of a dark art, how you set the interest rates on all your products. Can you take me through some of the thinking that you go through when you are making decisions about that?

Ian Ackerley: Yes, there's really three things that we're trying to do when we're setting our interest rates on all our products, and it's really about balancing the interest of the taxpayer, who's effectively paying the interest, the customers who are receiving it, but also the overall market. So, we look very carefully at other competitors and where they have pitched their equivalent products. And what we're trying to do is strike a point in the market where we're not disrupting what's going on, but as I say, we're giving a good return for customers and a good return for taxpayers. And that does mean that we are rarely at the top of the tables, but we think we're striking a fair balance for everybody who's involved in it.

Sarah Coles: One time when that sort of bucked the trend a bit was during the pandemic when NS&I were offering sort of market leading rates. Can you explain a little bit about that sort of thinking as well?

Ian Ackerley: Yes, that was a very different situation and the reason that we raise money is to help fund everything that the government does. So every year we get a target, the increase in the size of the customer savings that we have, the government requires each year. And so that's part of what we're managing. And during the covid crisis, the government needed an awful lot more money than it had before, and we were asked how much more we could raise. What we did was effectively held our rates and as a consequence of that, as competitors cut theirs, our rates rose to the top of the table. That enabled us to raise over £38 billion in the first six months of the covid crisis, which is about equivalent to what the government actually spent on the furlough scheme during that time.

Sarah Coles: In terms of the raft of NS&I products, I mean one of the newcomers is the green bond, which is offering something a bit different. Can you explain a little bit about that?

Ian Ackerley: This is a product which we launched in October over a year ago, and is all about giving consumers an opportunity to invest in the green investments that the government is making. So, it goes towards a whole range of green government projects from clean transport, energy efficiency, renewable energy, and it's all about helping the UK economy make that green transition to net zero. It's unique in our suite because it is linked specifically to one particular area of government expenditure. Everything else that's invested with NS&I goes effectively into everything that's done. But this is very carefully targeted on those green investments and so it is the very first green sovereign savings product that was launched in the world. So, it's always fun to have a brand new product and it's been quite an adventure for us. We've had to learn about green market. It is a different market, but I'm very proud that we've had the opportunity to launch it.

Susannah Streeter: How important is it, Ian, for you to be transparent about the projects being supported by it?

Ian Ackerley: That's really important, and I think that's a concern for a lot of consumers is that there's quite a few green products that are launched and the question marks are raised as to whether they're genuinely invested in green projects and I'm very proud of the transparency that's related to this product. In September last year, the government published the green finance allocation report, which was the first one of the reports to report after a year of having green products available. And that identified the specific projects that were being backed by not only the investments in the green savings bond but also something called the green gilt, which is a product that's sold by another part of government to the big institutions. And between those two, the government raised about £16 billion and that has gone into specific projects. And so that's all absolutely crystal clear set out for customers to be able to see where all that money that was raised has gone. It's going into making transport cleaner, into renewable energy, you know, promoting that over the use of fossil fuels, preventing pollution and helping people use energy in a more efficient way as well. There's a couple of other areas as well which are around protecting natural resources and also adapting to a changing climate. So those are the sorts of projects that the money is going into. It's a really exciting opportunity for many people who want to be able to make an investment which they can be sure is going into a genuinely green project.

Susannah Streeter: So are sales of green bonds going as you expected?

Ian Ackerley: When we launched the product, as I say, it was brand new, it was unique in the market. There were some other green savings institutions that existed, but there wasn't a government backed green savings product. So it's very difficult to know exactly what sort of return customers would expect on a product like that. So, we did price it very cautiously initially cause we wanted to make sure as many people as possible who really wanted to buy a green product could buy a green product. And then we have progressively increased the rate on it and that's partly also because of Bank of England rates have been going up as well and therefore we've had to raise the rate on the product and we've up the rate from 3% to 4.2% in recognition of the fact that interest rates across the market have risen. So, it's sold as we expected it would sell and we will continue to review the rate on it, trying to strike that balance of getting customers in, but not wishing to damage the existing players in the market. We want to pay a fair rate of return for the customers, something which isn't too onerous on the taxpayer, but also crucially, isn't undermining the rest of the green savings market because we are really keen for the green savings market to flourish as well. So it is a balancing act between those. I'm happy with the way the product is selling at the moment.

Sarah Coles: So obviously when you're looking for the balance of different rates, it does come across that your Junior ISA rate sort of tends to be something that tends to be priced quite competitively. Is there sort of a conscious effort that you trying to ensure that you are getting sort of NS&I customers as young as possible?

Ian Ackerley: With the Junior ISA, absolutely. It is a way of bringing in younger people. We are committed strategically to inspiring a stronger savings culture in the UK and I think one of the ways we can achieve that is by encouraging young people to save in particular. And we've got a fantastic loyal customer base of over 25 million customers, and they cover the broad demographic of the UK of all ages, all different backgrounds, but a lot of those customers have been with us for a very long time and we have to keep refreshing the customer base. So, it's really important that we keep bringing in more younger customers as our older customers leave us, and that's why we try and ensure the Junior ISA is competitive. It's also true that a couple of years ago we reduced the minimum investment in premium bonds from £100 pounds to £25. And again, the reason for doing that was to make them more accessible to more people because it was a recognition of the fact that not everyone can put £100 in one go into a savings product and hence we reduced it to £25. We also, in that case, opened it up so that it wasn't just grandparents and parents that could buy for children, we also enabled anybody to buy for any child. And that was very much about trying to create that stronger savings culture by making sure that more children grow up with a savings product and therefore hopefully when they get older and they have their own money, they will continue to save. And I think that's really important because having a little nest egg somewhere, a little pot of money just in case of an emergency is really important for all of us. And if children can grow up with that and are used to the idea of having one, then hopefully they'll carry that through the rest of their lives too.

Sarah Coles: Well here's hoping you are building lots of mini savers. Thank you very much, Ian.

Ian Ackerley: Thank you very much indeed.

Sarah Coles: I should also add that these are the views of the interviewee and aren’t a recommendation to buy any product.

Susannah Streeter: Let’s find out what the current climate means for some of the biggest banking names in the business? Let’s bring in Sophie Lund-Yates, our lead equity analyst, who’s been exploring the conditions for some listed financial businesses. So, Sophie, to kick off with, you’ve been looking at an international giant with close ties to home?

Sophie Lund-Yates: Yes, I’ve been looking at UK-listed HSBC, which although has its home in London, is very much tied to Asia in terms of where its revenue and profits come from. There are a few things to consider. HSBC has seen a 12% rally in the last month as the market became excited at news of China reopening, which has real benefits for HSBC and other Asia-facing banks. Really, that brings me on to my next point which is that HSBC has two clear growth levers at its disposal in the current environment. With interest rates higher than they have been, and further increases expected, this improves banks’ ability to profit on their interest-income products. So, loans and mortgages to you and me. This is something I expect to benefit HSBC, but the bank also has a big exposure to non-interest income, so banking products that aren’t tied to interest rates. That’s things like wealth management services or investment banking commission, trading fees and the likes. HSBC is spending $6bn through to around 2027 in these alternative areas, and the reopening of Hong Kong’s borders unlocks a lot of wealth management potential in the short term. It’s also worth pointing out that back in November, HSBC announced the sale of its Canadian business for $10.1bn. This improved the bank’s capital position and gives it options. There are hopes this sum could result in a special dividend or share buyback, but this isn’t guaranteed. The biggest thing to consider in terms of risk for HSBC is economic risk. The bigger exposure to Asia is a benefit in many ways, but the outlook is hard to predict and can be more volatile. That increases the chance of ups and downs.

Sarah Coles: And what about a bank with a bit more of a domestic UK focus?

Sophie Lund-Yates: I’ve also been looking at Lloyds Banking Group, which you can think of as a bread-and-butter bank. It’s very reliant on traditional banking, like those loans, mortgages, easy access accounts and credit cards. I’ve talked about Lloyds before so won’t go into too much detail, but essentially, higher interest rates are an especially useful development for a bank like this. Lloyds is throwing a lot of money at a bit of a strategic pivot which will see it earn more money on things like fees rather than interest, but for now it’s net interest margins, the difference between what a bank earns in interest and pays on deposits that are the key metric to watch where Lloyds is concerned. There are no huge warning signs where Lloyds is concerned but I would say that it’s very cyclical, so it tends to track the UK economy. The incoming recession risk is reflected in a valuation that’s a little way below the long-term average.

Susannah Streeter: And finally, Sophie, you’ve been looking at another financial giant that’s not quite a bank haven’t you?

Sophie Lund-Yates: Yes, I’ve been looking at Visa, which announced its results recently. Despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for money if a customer defaults. Instead, Visa charges banks for transferring funds. Service revenues are charged to card issuers and are calculated based on the value of the transactions. Data processing revenues depend on the number of transactions that take place and are charged to the bank of both the customer and the receiving business. Cross-border transactions come with additional fees and currency conversion revenues. And this area of the business is enjoying a rebound as travel resumes and China reopens. What really helps Visa stand out is its business model. Additional transactions are virtually costless, so extra revenue turns straight into profit. Capital expenditure is limited, meaning profits convert well into cash. Of course, the reverse is also true, so short-term revenue falls have a direct effect on profit. The most recent results show that consumer spending is holding up, but it’s important to note that there’s still expectations of a slowdown. A sharp downturn would dent transaction volumes even if it doesn’t face the same challenges as traditional banks.

Susannah Streeter: Certainly ones to keep a watch on. Okay, Sophie, thanks very much.

Sarah Coles: So, let’s get a wider perspective about the issues at stake when looking at banks from an environmental, social and governance perspective. It’s a good time to bring in our ESG Analyst Laura Hoy.

Susannah Streeter: So, Laura, apart from the macroeconomic headwinds facing the banking sector, there are some other banking sector risks to be aware of aren’t there Laura?

Laura Hoy: Absolutely, a lot of people make the mistake of assuming ESG is a sort-of catch-all term for being environmentally friendly. That’s part of it, but it’s also about being a good corporate citizen and how that could impact long-term financial performance. Don’t forget there are two other letters in that acronym, s for social and g for governance. For banks it’s actually Governance, essentially how they’re run, that’s historically been the biggest ESG risk. Because of the nature of the business, issues like market manipulation, tax evasion and corruption really loom large over the industry. For example, right now there’s a heightened risk for sanctions evasion for banks with exposure to Russia. These sorts of business ethics breaches are not only the most frequent ESG risks, they also tend to be the most severe. On top of the reputational damage that comes with an ethical misstep, there are often huge financial consequences that weigh on the bottom line for years.

Susannah Streeter: So, Laura, how do you spot banks with lower risks in that area?

Laura Hoy: Banks with the best reputations tend to be those with good regulatory relationships and transparent policies. But things like location are also a factor. Banks based in the US, for example, have a higher risk profile when it comes to product governance and that’s because consumer lawsuits are more frequent. More recently, alongside these governance considerations, environmental concerns have come to the fore for banks. People are starting to take environmental credentials into account before making lifestyle and financial decisions and that’s led to some banks promoting themselves as a sustainable option. But with anti-greenwashing legislation in the pipeline, Banks are going to have to prove they’re making good on these promises or risk getting stung for misleading customers.

Susannah Streeter: So, this really is a complex sector to analyse, isn’t it? The banks themselves might reduce their carbon footprint and treat their employees fairly, but the projects they finance could be more controversial.

Laura Hoy: Yes you’re right there, and that’s an issue that’s playing out right now at some of the world’s biggest banks. Despite commitments to support a global effort toward net zero, a lot of banks are still lending to fossil fuel companies and in many cases that money goes toward the development of new sites. This is something that sort of flies in the face of the International Energy Agency’s guidance, which said no new oil fields should be developed from 2021 onward if we’re going to hit net zero by 2050. But a lot has changed over the past two years, concerns about energy security given the war in Ukraine means we haven’t really stuck to that guidance. The other side of that argument is this kind of investment is inevitable as we look for short-term solutions to plug the supply gap. And for some banks, exposure to fossil fuel lending is largely dependent on where they operate. Standard Chartered, for example, has been pulled out as one of the biggest UK lenders backing coal power expansion. This is in part due to the bank’s large presence in Asia where coal is still a big part of the energy mix. The sticking point is whether banks are being transparent about their involvement in this investment. Can you really claim to have sustainability as a key priority when a huge part of your operations is reliant on such detrimental activities.

Sarah Coles: So, part of the problem is regulation, isn’t it? It’s unclear exactly how banks are meant to quantify their impact if they’re looking outside their organisation?

Laura Hoy: Exactly, and that’s part of what makes this aspect such a huge business risk for the sector. New regulations are on the horizon and will require big companies to disclose scope 3 emissions. For banks that would mean the emissions generated by the projects they finance. Including this class of emissions could drastically change the credibility of a bank’s net-zero pledge, and it opens the door for greenwashing accusations. Outside of the potential reputational and regulatory risks that stem from greenwashing, there are business risks as well. It’s important for investors to fully understand how reliant on fossil fuels a bank has become if they’re going to make long-term investment decisions. If net-zero really is the direction of travel over the next 20 years, banks with the majority of their income tied to oil and coal have a real risk of being left out in the cold following the energy transition. By disclosing that information clearly, investors can more accurately consider that risk.

Susannah Streeter: It’s really interesting to take all this on board. Laura, thanks very much for that insight.

Sarah Coles: And with one eye on the future, we can bring in Emma Wall now, our Head of Investment Analysis and Research, who has been talking to Nick Shenton, manager of the Artemis Income Fund at Artemis Fund Managers.

Emma Wall: Hi Nick.

Nick Shenton: Hi Emma. How are you?

Emma Wall: I'm very well, thanks. How are you?

Nick Shenton: Very good, thank you.

Emma Wall: So we're here today to talk about banks and financial services. I thought we'd start by talking about the relationship between banks, revenue, that's the money that come into banks, and interest rates. Cause while for many people higher interest rates are a bad thing, which stops them growing, for banks actually it can be a positive thing in terms of the bottom line, can’t it?

Nick Shenton: Yeah, that's absolutely correct. The last 10 years of very low interest rates have really been a major headwind for banks to face into. And the simple rule of thumb is higher interest rates should broadly translate through to higher profits for banks.

Emma Wall: And does that mean you are optimistic about the outlook for banks from an investment point of view in 2023?

Nick Shenton: I think on balance, yes. We are looking at the landscape for banks and we’re more optimistic about the potential for profit growth and distributions to the owners of the business in the form of dividends. And it's not just this year and our average holding period is north of six years and we tend to look out and try and forecast cash flows 3, 4, 5 years ahead. And what we can see is actually that there's a rolling period of an uplift in profitability for the banks that's coming and that's because during the pandemic they were reinvesting effectively at 0% interest rates on their own capital. And as that long term hedging rolls off, there's a mathematical uplift which should persist not just through 2023, but indeed 2024 and 2025, which really fits with this background that the banks are run pretty sensibly and arguably conservatively for the benefit of all stakeholders. And that's as a result of change in regulation, which is much more long-term thinking and arguably in some sense is positively demanding for society.

Emma Wall: Now you mentioned the regulator there and you've also mentioned dividends obviously cause you are an income fund manager and the pandemic. I think it's probably just worth revisiting that period because as you mentioned in the pandemic, banks reinvested, and that's because the regulator encouraged them not to pay a dividend because of the economic outlook, you know, the lockdown impact on the global economy and how that had impacted other sectors and other individuals. As we look at the economic outlook for 2023, it's not exactly, or should we say gilded, how much do you consider whether the regulator will put similar restraints or encourage similar dividend cutting in the financial services sector this year?

Nick Shenton: We think the environments are probably different. And that’s because the pandemic, let's hope, was genuinely a one in a hundred year event. What we're facing into now is a pretty well telegraphed and understandable slowdown or recession from a normalisation of interest rates. We think the banks are in a pretty strong position on the amount of capital they hold, and that's really been 10, 12 years in the making. By international standards and by historical standards they've got very strong capital positions. And the cash conversion, the profits that can be distributed to shareholders, remain pretty strong. So, we would be extremely surprised if there were a challenge to the dividends paid by banks. Indeed, it looks as though on a basis of analysing last year's numbers, the distributions to shareholders were the biggest they'd been in a decade. In fact, probably as big as the previous decade combined, which just shows the strength of the bank's balance sheets. And that in no small part is due to the regulatory framework that's been put in place over the past decade.

Emma Wall: And in the UK, broadly, banks fall into two camps and that is the international focused ones and those with revenues that are global such as HSBC and Standard Chartered. And then you have the ones which are much more geared towards, and their revenues come from, the UK consumer. Do you have a preference between those two groups?

Nick Shenton: Well, you correctly identify that they have different characteristics in terms of where they operate their businesses and yes, you might say that Lloyds and NatWest and Barclays are more domestic focused, and HSBC and Standard Chartered are international plays, primarily Asia. We assess them on their own merits. But what really stands out to us for the bank sector in aggregate is it looks to us like the backdrop, the landscape in which they're operating, recessions aside, is improved versus the past 10 years because they've built up their capital positions. The cultures have shifted probably for the better, they're more conservatively run, the cash conversion is higher because they're not paying out PPI fines, for example, and the interest rate environment is better for them as businesses around the world. So, we wouldn't really draw a distinction between the dividends and the distributions that are available to shareholders within those banks. It looks like investors are pretty sceptical about the ability of them to distribute as much as it looks like they are going to do, but clearly there's different characteristics in terms of the business model. But what we'd say about the UK banks is they're pretty conservatively and sensibly managed and your primary exposure is on mortgages. And if you were to take NatWest, the average loan to value is around 50%, so it's a pretty conservatively finance book of business.

Emma Wall: Nick, thank you very much.

Nick Shenton: Thank you Emma.

Susannah Streeter: Well, that was Nick Shenton there from Artemis Fund Managers talking to Emma Wall. And please bear in mind these are the views of the fund manager and are not individual stock recommendations. You are listening to Switch Your Money On, from Hargreaves Lansdown. And now it’s time for the stat of the week, and we’re going to serve up a couple of numbers for you...First up, before we talk Big Macs, I know you’re salivating right now Sarah, here’s a stat you might not know about the proportion of retail investors, as opposed to institutional investors on the stock market. Individual retail investors hold around 15% of UK listed shares. Interestingly, this came up as we’ve launched a new electronic voting service, the idea is that more investors who hold shares on our platform can be active shareholders more easily, as it allows shareholders to vote and attend meetings virtually, like AGMs relating to their shareholdings via their HL account. And it should give investors a greater say on the governance of these companies.

Sarah Coles: And finally, the Economist has brought back its Big Mac index. So, this was a concept made up by the editorial team at the magazine as a fun way of assessing whether currencies are trading at their correct level. It’s based on purchasing power parity, and the expectation that over time exchange rates should move towards the rate that would make the price of a certain product, in this case a Big Mac, identical in two countries.

Susannah Streeter: So, that’s the overview, but now I’m going to ask you Sarah, what you think the price of a Big Mac is here in the UK. Because I know you haven’t actually looked in detail yet at these numbers.

Sarah Coles: I don’t know! Honestly, I’ve been vegetarian for such a long time now I couldn’t remember what it tastes like, never mind what it costs! So, I’m going to go with £3.

Susannah Streeter: It’s actually £3.79 on average in Britain – though not at an overpriced motorway service station of course. But in the US it’s $5.36 – the implied exchange rate is 0.71, but the actual exchange rate is around 0.83, obviously fluctuating exchange rates, which suggests the pound, according to the Economist is around 13% undervalued. You may scoff, but the Big Mac index is used as a benchmark around the world and used to teach economic theory.

Sarah Coles: So Big Macs are big news in schools which I suppose it makes a change from all the talk about turkey twizzlers in schools.

Susannah Streeter: It certainly does. It doesn’t matter how much we bang on about healthy eating, they always seem to want a takeaway.

Sarah Coles: That’s all from us this time, but before we go, we need to remind you that this was recorded on 6 February 2023, and the interview with Ian was recorded on 7 February 2023. All information was correct at the time of recording. 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. Past performance isn’t a guide to the future.

Susannah Streeter: This is not 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 Coles: 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 Streeter: 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 Coles: 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 Laura, Sophie, Ian, Nick, Emma, and our producer Elizabeth Hotson.

Susannah Streeter: Thank you so much for listening. Goodbye.