In the Hamilton Capital Global Bank ETF (HBG; TSX), we went underweight U.K. banks heading toward the Brexit referendum, with just 3% of exposure; over time, we would expect this to be closer to 5-7% (see our HBG Manager Comment, “U.K. Banks: Remaining Underweight for Brexit as CDS Spreads/Polls Diverge”, June 8th). Here are some preliminary thoughts on implications of Brexit, particularly as related to HBG. First, the…
Insights: Region
Five Reasons Why We Don’t Own C, JPM, BAC, GS, or MS
In this note, we provide five reasons why we do not have positions in Citigroup (C), JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS), or Morgan Stanley (MS), despite the fact that these banks/brokers are very inexpensive, trading near or below TBV. In fact, their lower valuations are directly linked to the fact their ROEs remain below their cost of capital (although JPM is close).
U.K. Banks: Remaining Underweight for Brexit as CDS Spreads/Polls Diverge
Given the United Kingdom’s superior long-term growth profile and favourable demographics, we would expect the Hamilton Capital Global Bank ETF (HBG; TSX) to – over time – have an allocation to U.K. banks of between 5 and 7%, including the ‘challenger’ banks. That said, since the fund was launched, the portfolio weighting to U.K. banks has been closer to 3% as we seek to reduce the…
On HBG, Five Reasons Why We Don’t Own C, JPM, or BAC
In the Hamilton Capital Global Bank ETF (HBG), we do not have positions in Citigroup (C), JPMorgan (JPM), or Bank of America (BAC), despite the fact that these banks are very inexpensive trading near or below TBV. Their lower valuations are directly linked to the fact their ROEs remain below their cost of capital. Just how low is profitability for these three mega-cap banks? ROEs in…
Part #3 of 3: Canadian Banks – Are Falling Global Reserve/Capital Rankings Increasing Regulatory Risk?
In our three-part series, Canadian Banks: How Worried Should You Be (about Rising Energy Losses, Low Reserves, and Recessionary Alberta)?, we have been reviewing the challenges facing the sector. In this Insight, we discuss another potential issue facing the Canadian banks: rising regulatory risk. With the sector near the bottom of global rankings for key capital and reserve ratios, we discuss the potential for policy makers to…
Part #2 of 3: Canadian Banks – How Worried Should You Be (about Rising Energy Losses, Low Reserves, and Recessionary Alberta)?
With a 20% rise in loan losses in fiscal Q1, it would appear that Canadian banks are entering at least a mild credit cycle. In our view, the magnitude of provisions for credit losses taken over the next several quarters will be influenced by three issues: (i) an over 50% decline in the price in oil is placing stress on more than $100 bln in drawn/undrawn…
U.S. Banks Feel the Pressure from Low Oil Prices; Reserve Builds Continue
Last week, Wells Fargo (WFC), one of the largest banks in the United States, announced significant increases in reserves and charge-offs for energy loans as part of the company’s Q1 2016 earnings release. WFC increased its reserves-to-loan ratio to 9.3% of total outstandings[1]. The bank attributed this change to deterioration in financial performance and collateral, driven by lower energy prices (it also disclosed that just 7%…
Part #1 of 3: Canadian Banks – Are Sectoral Allowances the Solution to Low Reserve Ratios?
The Canadian banks have very low reserves-to-loans ratios (“reserve ratios”). Why? The banks are generally restricted by accounting rules from setting aside specific reserves until after there has been some form of impairment/loss event (often referred to as an “incurred loss” model). This makes it very difficult for the Canadian banks to set aside allowances/reserves for impaired loans in advance of loans going “bad”. The result,…
On HBG, Adding LB to Reduce Energy Risk, Retain 5% Tax Efficient Yield
We recently replaced a large-cap Canadian bank with Laurentian Bank (LB) in Hamilton Capital Global Bank ETF (HBG), in order to reduce the ETF’s exposure to energy lending. LB has a 4.9% dividend yield and at the time of writing, trades at 8.4x f2016 earnings, or a ~20% discount to the Big-6 average. Investors familiar with LB might question the switch, as most are aware that…
Reducing Energy Exposure; Going Modestly “Underweight” Canadian Banks
As explained in Hamilton Capital Global Bank ETF (HBG)’s prospectus, it is anticipated, over time, that HBG’s geographic mix will roughly represent: 50% North America, 25% Europe and 25% other countries. Although completely flexible, within the 50% allocation to North America, we generally aspire to a geographic mix of Canadian banks (15%) and U.S. banks (35%). Given our concerns over rising direct/indirect losses from energy lending,…
Part #2 of 2: Why the Canadian Investment Banks Largely Avoided the Painful Global Restructuring
In Part #1: Why the Global Investment Banking Model is Under Siege, we discussed why the global investment banking model is undergoing a painful restructuring. Hardly a day goes by without bad news of the challenges facing the global investment banks. In this Insight, we address the obvious question: “With their large investment banking operations, how have the Canadian banks largely avoided this painful global restructuring?”.
Another U.S. Bank Pre-Announces Large Increase in Energy Reserves
Yesterday, Hancock Holding Company (“HBHC”) pre-announced significant increases in provisions for energy loans. HBHC, a $22.8 billion (assets) bank which is based in Mississippi and has large operations in Texas and Louisiana, now expects that its provision for losses in the first quarter will total approximately $58-$62 million, potentially bringing the reserve up to ~8.5% of energy loans. Just over two months ago, HBHC management guided…