Our most recent commentary focused on the state of banks’ balance sheets, when we argued that not only are they well reserved for future loan problems (even though there is little evidence, as yet, of these problems) but they have considerable surplus capital should current assumptions prove too generous (and, in our view, more than enough to start paying dividends again). However, what if the underlying reason for the discount attached to banks (see charts below) is nothing to do with the quality of their balance sheets, but more about investors’ views on the outlook for their business models in a digital era? After all, the chart below highlights how investors are happy to assign large premiums in the payments space on the perceived strength of their longer-term structural positioning.

Continue reading...