Banks during COVID-19: A crisis of sentiment, not balance sheet
George Barrow
Fund Manager, Global Financials Team
Nick Brind
Fund Manager, Global Financials Team
John Yakas
Fund Manager, Global Financials Team
2020 has not been an easy year for bank investors, either relative to overall markets or other subsectors within the financial sector. As shown below, US banks have underperformed the broader market by 40% year to date, (even excluding tech the banks have underperformed a lot), a performance gap that is significantly wider than the lows of the global financial crisis (GFC) in March 2009.
European banks have been even greater laggards and are trading at record low valuations in terms of relative P/E versus the market, a 53% discount versus a long-term average of 27%, and at 0.4x price/book (P/B). To give some context on the relative weakness of banks in Europe, the market cap of eurozone banks is 38% of Australia and Canada’s banking sectors combined yet the eurozone GDP is nearly six times their size. Within Europe, UK banks have been in the eye of the storm, affected by political risk, in relation to both Brexit and US/Chinese tensions, as well as economic uncertainty related to COVID-19, and have fallen 50% YTD, underperforming their European peers. HSBC is now trading at a lower P/B multiple than in both the global and Asian financial crises.
The myriad of different issues potentially driving these concerns include lower rates forever, fears over the asset quality outlook, last crisis memories, dividend restrictions, fintech challengers, political risk ahead of the US election, Brexit and so on. Frighteningly, the list is long for investors like us, but the issue is how valid they are.
Here, we will focus on the issue of bank balance sheets and fears over a potential asset quality crisis. In a subsequent commentary, we will look at whether the current environment has weakened their structural positioning and long-term profitability.
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He works closely with John Yakas on the Polar Capital Asian Opportunities Fund and is a co-manager on the Polar Capital Financial Opportunities Fund, with John, and the Polar Capital Global Financials Trust, with John and Nick Brind.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Nick Brind
Nick joined Polar Capital in September 2010 following the acquisition of HIM Capital, and is manager of the Polar Capital Income Opportunities Fund and co-manager of the Polar Capital Global Financials Trust Plc.
Prior to joining HIM Capital, Nick worked at New Star Asset Management. While there he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies, which outperformed its benchmark index in all six years that Nick managed it. Previously, Nick worked at Exeter Asset Management and Capel-Cure Myers. At Exeter Asset Management, Nick managed the Exeter Capital Growth Fund from 1997 to 2003 which over this period was in the top decile of the IMA UK All Companies Sector.
John Yakas
John joined Polar Capital in September 2010 and is fund manager of the Polar Capital Asian Opportunities Fund, Polar Capital Financial Opportunities Fund and co-manager of the Polar Capital Global Financials Trust Plc.
Previously, John worked for HSBC as a banker based in Hong Kong and was the head of Asian research at Fox-Pitt, Kelton. In 2003 he joined Hiscox Investment Management which later became HIM Capital. John has won Lipper awards in the equity sector banks and other financials sector in 2010, 2011, 2012 and 2013 for the performance of the Polar Capital Asian Opportunities Fund.
