Alpha-Centric ESG Research

Kyle Rudden

Last week, I published a report and used a proverb as entré into the main topic.For this report, a particular colloquial idiom seems appropriate: "Eating crow."One "eats crow" after taking a position on something, then being proven wrong.In <a href="https://www.smartkarma.com/insights/asia-exchanges-lead-in-esg-hkex-jpx-sgx" target="_blank" data-smartkarma-citation="insights:34447" rel="noopener">Asia Exchanges Lead in ESG: HKEX, JPX, SGX</a>, I stated my belief that private-sector capital is the cornerstone of sustainability, and implied that the public sector's role is limited to policy.I still feel that way, but the timing of a public-sector announcement has me, well, eating crow.Also last week, the European Investment Bank announced a major climate-centered financing strategy that entails, among other things, phasing out all fossil fuel-related lending.It's a move that private-sector banks should aspire to. And it inspired me to write this.In my aforementioned report, I noted that exchanges – movers of the money that makes the world go 'round – are uniquely positioned for impact through ESG and sustainable finance policies.That applies to the financial sector as a whole, not just exchanges.Addressing the entire financial sector in one report would be insanity, for both of us. However, the EIB news prompted me to tackle one critical aspect of sustainable finance.Climate finance. The big "E" in ESG.This Insight analyzes fossil fuel-related financing activities – recent, current, and future – of major money center bank stocks, plus a couple of big investment banks. Key points are:<ul>
<li>Regardless of your stance in climate, fossil financing matters from a purely economic view</li>
<li>European banks are, hands down, the "winners" in what is essentially a no-win situation</li>
<li>U.S. banks, on the other hand, are among the most offensive offenders re: climate finance</li>
<li>Asia Pacific ranked in the relatively unremarkable middle, not a bad thing for this subject</li>
<li>A few banks (<a href="https://www.smartkarma.com/entities/royal-bank-of-scotland-group" target="_blank" data-smartkarma-citation="entities:21008:1" rel="noopener">Royal Bank of Scotland (RBS LN)</a> , <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas (BNP FP)</a>) outclass the majority</li>
</ul>

Last week, I published a report and used a proverb as entré into the main topic.For this report, a particular colloquial idiom seems appropriate: "Eating crow."One "eats crow" after taking a position on something, then being proven wrong.In Asia Exchanges Lead in ESG: HKEX, JPX, SGX, I stated my belief that private-sector capital is the cornerstone of sustainability, and implied that the public sector's role is limited to policy.I still feel that way, but the timing of a public-sector announcement has me, well, eating crow.Also last week, the European Investment Bank announced a major climate-centered financing strategy that entails, among other things, phasing out all fossil fuel-related lending.It's a move that private-sector banks should aspire to. And it inspired me to write this.In my aforementioned report, I noted that exchanges – movers of the money that makes the world go 'round – are uniquely positioned for impact through ESG and sustainable finance policies.That applies to the financial sector as a whole, not just exchanges.Addressing the entire financial sector in one report would be insanity, for both of us. However, the EIB news prompted me to tackle one critical aspect of sustainable finance.Climate finance. The big "E" in ESG.This Insight analyzes fossil fuel-related financing activities – recent, current, and future – of major money center bank stocks, plus a couple of big investment banks. Key points are:
Regardless of your stance in climate, fossil financing matters from a purely economic view
European banks are, hands down, the "winners" in what is essentially a no-win situation
U.S. banks, on the other hand, are among the most offensive offenders re: climate finance
Asia Pacific ranked in the relatively unremarkable middle, not a bad thing for this subject
A few banks (Royal Bank of Scotland (RBS LN) , BNP Paribas (BNP FP)) outclass the majority


European Banks: Exemplars of Climate Finance

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares.
<div class="content-highlight">
VFM is simply Value, Fundamentals, and Momentum.
</div>
<ul>
<li>For value, we utilise a franchise valuation based on the market pricing of the funding base.</li>
<li>For fundamentals, we incorporate our PH Score - a value-quality score based on financial metric change/momentum.</li>
<li>For Momentum, we prioritise a negative RSI.</li>
<li>The last filter relates to a default probability score where each bank is assigned a risk ranking.</li>
</ul>
We simply rank each of the four screens to arrive at an overall ranking. We are on the hunt for cheap assets which are neglected by the market - sometimes for a very good reason, sometimes unfairly so. 
<div class="content-highlight">
So what are the conclusions of our VFM screen?
</div>
<ul>
<li>There are opportunities and traps (HSBC and DBS?) from all jurisdictions in quintile1.</li>
<li>European lenders with greater EM exposure feature.</li>
<li>UK and Austrian banks stand out. The latter again marked by EM exposure.</li>
<li>Japan and European banks in general have low valuations.</li>
<li>US banks carry a lower level of risk.</li>
<li>Some MENA (Saudi Arabia and Jordan for example) and Greater China banks are included.</li>
<li>Moving up the risk ladder, South Korean, Russian, and Turkish banks stand out. With regards the latter, there is a real concern that the fundamental metrics will deteriorate before very long. In fact, some can argue that this is already happening. But there is a price for everything and assets can get beaten up excessively by the herd. Sanction-sodden Turkey and Russia are intriguing on a five year timeframe or from a trading perspective. </li>
<li>There are number of banks featured in the quintile that we have written about such as <a href="https://www.smartkarma.com/entities/341" target="_blank" data-smartkarma-citation="entities:341:1">Bank Of East Asia (23 HK)</a>, <a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">Sberbank Of Russia, </a><a href="https://www.smartkarma.com/entities/27001" target="_blank" data-smartkarma-citation="entities:27001:1">Emirates NBD PJSC (EMIRATES UH)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/12843" target="_blank" data-smartkarma-citation="entities:12843:1">Hana Financial (086790 KS)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/11841" target="_blank" data-smartkarma-citation="entities:11841:1">Woori Bank (000030 KS)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/21251" target="_blank" data-smartkarma-citation="entities:21251:1">Banco Bilbao Vizcaya Argentari (BBVA SM)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/24865" target="_blank" data-smartkarma-citation="entities:24865:1">ING Groep NV (ING VX)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, and </a><a href="https://www.smartkarma.com/entities/436" target="_blank" data-smartkarma-citation="entities:436:1">Ctbc Financial Holding (2891 TT)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">.</a> In fact, we believe that quintile 1 is ripe for extensive research given risk-reward profiles.<a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1"></a>
</li>
<li>For frontier types, selective Sri Lankan and Nigerian banks stand out.</li>
<li>In quintile 5, there are a sprinkling of Indian, Indonesian, Thai, and LATAM banks (including Brazil but not Argentina interestingly). Mexico's huge rally means that it may no longer offer such upside.</li>
</ul>

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares.

VFM is simply Value, Fundamentals, and Momentum.


For value, we utilise a franchise valuation based on the market pricing of the funding base.
For fundamentals, we incorporate our PH Score - a value-quality score based on financial metric change/momentum.
For Momentum, we prioritise a negative RSI.
The last filter relates to a default probability score where each bank is assigned a risk ranking.

We simply rank each of the four screens to arrive at an overall ranking. We are on the hunt for cheap assets which are neglected by the market - sometimes for a very good reason, sometimes unfairly so. 

So what are the conclusions of our VFM screen?


There are opportunities and traps (HSBC and DBS?) from all jurisdictions in quintile1.
European lenders with greater EM exposure feature.
UK and Austrian banks stand out. The latter again marked by EM exposure.
Japan and European banks in general have low valuations.
US banks carry a lower level of risk.
Some MENA (Saudi Arabia and Jordan for example) and Greater China banks are included.
Moving up the risk ladder, South Korean, Russian, and Turkish banks stand out. With regards the latter, there is a real concern that the fundamental metrics will deteriorate before very long. In fact, some can argue that this is already happening. But there is a price for everything and assets can get beaten up excessively by the herd. Sanction-sodden Turkey and Russia are intriguing on a five year timeframe or from a trading perspective. 
There are number of banks featured in the quintile that we have written about such as Bank Of East Asia (23 HK), Sberbank Of Russia, Emirates NBD PJSC (EMIRATES UH), Hana Financial (086790 KS), Woori Bank (000030 KS), Banco Bilbao Vizcaya Argentari (BBVA SM), ING Groep NV (ING VX), and Ctbc Financial Holding (2891 TT). In fact, we believe that quintile 1 is ripe for extensive research given risk-reward profiles.

For frontier types, selective Sri Lankan and Nigerian banks stand out.
In quintile 5, there are a sprinkling of Indian, Indonesian, Thai, and LATAM banks (including Brazil but not Argentina interestingly). Mexico's huge rally means that it may no longer offer such upside.


Netherlands

ING Groep N.V. (ING) is a global financial institution. The Company provides retail and wholesale banking services to private clients, small businesses, large corporations, financial institutions, and governments. ING Groep operates worldwide.

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ING Groep NV (ING VX)

European Banks: Exemplars of Climate Finance

Last week, I published a report and used a proverb as entré into the main topic.For this report, a particular colloquial idiom seems appropriate:...

Kyle Rudden

Global Banks: Why VFM Matters

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares. VFM is...

Paul Hollingworth

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