Q&A: Can global bank stocks continue to rise?

14-Dec-2016
By Vasco Moreno

Vasco Moreno, Portfolio Manager of the BlackRock World Financials Fund, provides his views on bank shares, which have rallied on the back of steeper yield curves and hopes of looser regulation under President-elect Donald Trump.

Are the moves in the eurozone and UK
banks overdone?

I don’t think the moves in the eurozone banks are overdone. I think they’re still among the cheapest globally and even a very faint prospect of slightly higher rates will lead to a material improvement in their profitability. We’ve simply seen the bank shares following what’s happened at the long end of the yield curve in the eurozone, which I think is sensible. Eurozone banks collapsed on Brexit and ever since then they’ve been recovering on this reflation theme. It’s a theme that’s been accelerated by Trump but it started much earlier.

It’s harder to plot the future for UK financial institutions because of the prospect of Brexit and the uncertainties around it, both macro and regulatory.

Conversely, the US is in a very good position because the economy’s growing faster, interest rates are higher and the prospects of a Trump administration fulfilling campaign promises would be a game changer in terms of earnings, particularly for the banking sector but also for life insurers.

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Which areas do you like in the eurozone?

The French and Dutch banks currently offer great risk/reward. They’re among the cheapest globally, among the highest-paying dividend stocks and, from both a political and macro perspective, they’re in a much more stable position than some others.

I also like some of the peripheral banks. We own two specifically: one in Italy and one in Spain.

Beyond the US, I’m most bullish about emerging markets and I’d highlight India as a very interesting market that we’re very overweight in

Where do you see opportunities for
banks globally?

US

The US is by far the most interesting. Better economic growth and higher interest rates are pretty straight forward positives for the banking sector, but it’s the Trump administration promises that, if delivered, could see earnings increase by 25%-50% over the next two years, according to our estimates.

Large spending on infrastructure should boost banking sector margins and Trump has also promised to do away with a lot of the regulation put in place since the great financial crisis. If you think this sector can get halfway back to the efficiency ratios of the early 2000s, again that’s a very big improvement in earnings. He wants much lower capital requirement levels too, particularly for some of the smaller banks, so you could very easily see a material increase in capital returns from the industry.

Another of the promises was to lower corporate tax rates, which would materially benefit domestically-focused regional banks.

The US banking sector has outperformed since the election but it had previously been very cheap compared to the rest of the market, so my sense is that there’s a lot more to go.

Emerging markets

Beyond the US, I’m most bullish about emerging markets and I’d highlight India as a very interesting market that we’re very overweight in. The key there is you have very good macro-economic growth, relatively high interest rates and attractive demographic and banking penetration pictures. This should translate into superior long-term earnings growth.

We also like Indonesia which has similar characteristics to India; we like China on a valuation basis, despite asset quality concerns; and we like Brazil also on a valuation basis and an improving macro picture. So I feel that from a risk/reward perspective, emerging markets, despite what Trump may bring in terms of trade, are very well positioned longer term.

Which markets should investors avoid?

We have no exposure to Canada where I think the banking sector is actually fine but it’s trading at materially higher multiples than in other markets.

The other large market we’re materially underweight is Australia. The Australian economy went from a commodities-driven boom to a housing boom that is now turning and I’m just a bit afraid – in the context of what are very full valuations – of a property-driven slowdown.

Another one is Japan, which is a dreadful market from a financial services perspective, with very low rates across the entire yield curve and a demographic picture that looks horrendous.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of December 2017 and may change as subsequent conditions vary.

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