Banking and insurance companies have been causing no end of excitement for investors over the past few weeks.

It is not just that the shares of Lloyds TSB currently offer a dividend yield greater than the interest rate on its own savings accounts. Rumours have been swirling around many of the leading groups that they may soon follow Abbey National into the hands of a rival. In the insurance sector, Aviva?s failed attempt to team up with rival Prudential was followed by details of Standard Life?s plans to demutualise.

Robin Down, an analyst at HSBC, says that the banks have not been immune from bid fever. ?Takeover speculation has been driving the sector over the past three to four months. It?s not unique to UK banks; it?s a European thing.?

But, says Mr Down, what is different is that we have fewer qualms about selling our banks to foreigners.

He agrees that yields ? the dividend divided into the share price ? can be attractive for banks such as Lloyds TSB, which currently offers more than 6 per cent. But he adds: ?The scope for dividend growth is quite limited. The classic case is Lloyds, where the dividend has been on hold for several years and is likely to remain so for another two to three years.?

The problem is the deteriorating outlook for bank profits, particularly in view of the nation?s high level of personal debt. Mr Down says that the average person forced to adopt an individual voluntary arrangement, an alternative to personal bankruptcy, owes £60,000 and has 11 credit cards. Typically, the bank only ever recovers half the resulting bad debt in such cases.

The way for investors to escape these domestic woes is to buy a bank that generates much of its earnings from overseas, suggests Mr Down.

Ken Murray, founder of Blue Planet Investment Management, a specialist in financials, agrees. ?For banks with overseas earnings ? HSBC, Standard Chartered and, to a lesser extent, Royal Bank of Scotland ? the prognosis is quite reasonable,? he says. ?For those with virtually no overseas earnings, such as Lloyds TSB, Bradford & Bingley and HBOS, the prognosis is pretty bad.?

Banks have been victims of their own success in lending, he suggests. Household debt here is equivalent to 90 per cent of the UK?s entire economic output, compared with as little as 6 per cent in countries such as Russia or Turkey. There is much more scope to add new business in these emerging markets, he says.

The City is slightly more optimistic about the insurance sector. Bruno Paulson, of Sanford Bernstein, the broker, says: ?I am positive about the long-term fundamentals, but less convinced about the prospects for takeovers.?

Key plus points, he says, include better disclosure of financial information and an ageing population that needs guaranteed financial returns. But while he tips Aviva, Roman Cizdyn, a rival analyst at Oriel Securities, still likes Prudential. He says that it is well placed in America, the UK and Asia, with a renewed push for growth under the newish management team.

So the experts say there is value among financial stocks, but you must be selective.

Times Online - http://myvesta.org.uk
Read more at: IVA UK site.”>http://iva-uk.blogspot.com/2006/04/what-banks-face-and-ivas.html.

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