Macro issues continue to dominate European bank valuations as the sector remains in focus, particularly following the recent Brexit vote. Given all of the concerns over European banks, it is worth noting that profitability for the sector has almost completely recovered to pre-cycle levels. In 2007 (the last “normal” year), the European banks made just over €100 bln in “core” earnings. At the same time, the…
Insights & Commentary
Spanish Election Results: No Governing Coalition (Yet), and No Gains for Anti-Austerity/Euro Skeptic Parties
Spaniards returned to the polls on Sunday, June 26 for the country’s second national election in six months. This came just three days after the UK surprised markets by voting to leave the EU.
Thoughts on Brexit and its Impact on the European Banks
It is safe to say, looking at today’s market movements, that the result of the U.K.’s E.U. referendum – a 51.9% victory for the LEAVE camp – has taken many investors by surprise. In this Insight, we share some preliminary thoughts on the implications of Brexit, particularly as it relates to the European banks.
Thoughts on Brexit (Entering Referendum with 12% Cash; Underweight U.K.)
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…
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).
On HBG, Significantly Higher Capital Levels than Canada/U.S. Banks
One of the objectives of the Hamilton Capital Global Bank ETF (HBG; TSX) is to pay regular/quarterly dividend income (supported by limited covered call writing) and, as a result, the fund emphasizes (higher) dividend paying banks. HBG also focuses on banks with higher capital ratios, particularly common equity tier 1 ratio (CET1), which is – by far – the most important to global investors (and regulators). The higher…
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…
In Q2 Earnings, Laurentian Bank Outperforms Larger Peers
Following Q1 quarterly earnings season, we made two portfolio changes with respect to the Canadian bank portfolio. First, we reduced our portfolio weighting from ~15% to ~12% (in favour of certain U.S. mid-cap banks). Second, we swapped out a large-cap Canadian bank with Laurentian Bank (LB). We explained these changes in the following two short HBG Manager Comments: Reducing Energy Exposure; Going Modestly “Underweight” Canadian Banks and…
Weighted Average Central Bank Rate of ~100 bps = Monetary Flexibility
Broadly speaking, Hamilton Capital Global Bank ETF (HBG; TSX) seeks to invest in banks with higher expected EPS growth, which generally means banks domiciled in the countries with the highest GDP growth rates. Importantly, as we highlighted in our “Key Themes in Global Banking”, we also favour countries with independent central banks, especially those with higher central bank rates, which provides crucial flexibility in monetary policy.…
On HBG, U.S. Mid-Cap Bank Holding YDKN “Rumoured to Explore Sale”
On May 25th, media reports indicated that Yadkin Valley Bank – a U.S. mid-cap bank holding of the actively managed Hamilton Capital Global Bank ETF (HBG; TSX) – had engaged an investment bank to “explore a sale”. The North Carolina based bank has ~$7.5 bln in assets, a ~US$1.4 bln market capitalization and represents ~1.5% of the fund. Private equity firms own ~13% of the company.…
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…
Minimizing Exposure to Troubled Global Investment Banking Model
In our recent Insight, “Why the Global Investment Banking Model is Under Siege” (March 24, 2016), we outlined the struggles facing the global investment banking sector. Hardly a week goes by without an important development for the likes of JPM, BAC, C, MS, GS, or in Europe, UBS, CSGN, DBK, BARC, be it the restructuring of business models, low returns, or additional regulatory pressures. Even in…