Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Zimbabwe Financials / Thematic (Sector/Industry)

The latest Q120 data for banks is filtering into the marketplace.Strongest fundamental momentum appears to be in APAC, though Chinese SOEs fail to inspire with Bank of China even less so, irrespective of its latest oil trade glitch. Selective banks in South Korea -  <a href="https://www.smartkarma.com/insights/hana-much-to-applaud-on-asset-quality-and-opex-control" target="_blank" data-smartkarma-citation="insights:38794" rel="noopener">Hana: Much to Applaud on Asset Quality and OPEX Control</a> plus <a href="https://www.smartkarma.com/insights/kb-financial-a-staple-for-a-gem-portfolio" target="_blank" data-smartkarma-citation="insights:38886" rel="noopener">KB Financial: A Staple for a GEM Portfolio</a> - Pakistan - <a href="https://www.smartkarma.com/insights/pakistan-financials-jump-in-when-global-risk-off-dissipates" target="_blank" data-smartkarma-citation="insights:37287" rel="noopener">Pakistan Financials: Jump in when Global Risk-Off Dissipates</a> -, and some Thailand catch the eye though Kitanakin's overall PH Score is somewhat misleading as comprehensive income is miles apart from Net Profit. One has to be mindful too of different provisioning rules (ECL?) and relaxing capital criteria across the globe too. Or national accounting laissez-faire in the extreme - as in India for example.Subpar trends in the Chinese SOE space, not illustrative of the sector in general, are not dissimilar to US banks (5.3) which have reported their lowest PH Score for awhile. JP Morgan stood out with a very low score though some lenders were even poorer such as Cadence, Great Western Bancorp, New York Community Bancorp, United Banshares,  Northwest Bancshares, Pacwest, Colombia Banking System and First Republic etc. NIMs might be higher but US banks are much less efficient. Asset Quality is better than in China but is now a problem everywhere: the US is faced with huge challenges regarding energy and lodging exposures, corporate debt, student loans, sub-prime auto credit, etc and derivatives. The latter issue also concerns us with regards to not just Deutsche Bank but Japan with their penchant for risky international "market instruments".For EM, we remain intrigued that GEM favorites such as Sberbank, Credicorp, HDFC, and FAB remain at the bottom of our PH rankings on account of subpar fundamental momentum and trends.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>In terms of valuation, the big imponderable remains dividends. Some banks have cut while others may follow suit at some stage. Income compensation is an important anchor for investing in a bank: this can be the argument for holding a Sberbank or a FAB or a cheaper Chinese SOE. We focus on Earnings Yield and Franchise Value. Bearing in mind value-quality performance, APAC and Europe come out on top. It was not that long ago that Greek banks stuck out like a sore thumb in terms of rock-bottom valuation. This is no longer the case.The concern is that there is a creeping "Japanification" of systems with rates lurching precipitously downwards. This is horrendous for banks, forcing them to chase for yield or fees from enticing new products of dubious merit. We can clearly see this "Japanification" in core Europe but also in markets as diverse as South Korea and possibly even Brazil. A MMT world of negative yields in the US is not now such a long shot: whatever the FED does, or the stock market for that matter, bond yields are instructive and need to be heeded. I have heard it said that banks are a 100-year lows versus the market. I have also heard the same argument apply to miners. Regarding banks, the market is pricing in more risk than opportunity beyond sporadic rally gyrations of a bear market. The problem is that there is more risk still to price. This applies to the US, Australia, Canada and Europe but also to those EM banks which also function as Sovereign Debt treasure troves of troubled nations scrambling for dollars.

The latest Q120 data for banks is filtering into the marketplace.Strongest fundamental momentum appears to be in APAC, though Chinese SOEs fail to inspire with Bank of China even less so, irrespective of its latest oil trade glitch. Selective banks in South Korea -  Hana: Much to Applaud on Asset Quality and OPEX Control plus KB Financial: A Staple for a GEM Portfolio - Pakistan - Pakistan Financials: Jump in when Global Risk-Off Dissipates -, and some Thailand catch the eye though Kitanakin's overall PH Score is somewhat misleading as comprehensive income is miles apart from Net Profit. One has to be mindful too of different provisioning rules (ECL?) and relaxing capital criteria across the globe too. Or national accounting laissez-faire in the extreme - as in India for example.Subpar trends in the Chinese SOE space, not illustrative of the sector in general, are not dissimilar to US banks (5.3) which have reported their lowest PH Score for awhile. JP Morgan stood out with a very low score though some lenders were even poorer such as Cadence, Great Western Bancorp, New York Community Bancorp, United Banshares,  Northwest Bancshares, Pacwest, Colombia Banking System and First Republic etc. NIMs might be higher but US banks are much less efficient. Asset Quality is better than in China but is now a problem everywhere: the US is faced with huge challenges regarding energy and lodging exposures, corporate debt, student loans, sub-prime auto credit, etc and derivatives. The latter issue also concerns us with regards to not just Deutsche Bank but Japan with their penchant for risky international "market instruments".For EM, we remain intrigued that GEM favorites such as Sberbank, Credicorp, HDFC, and FAB remain at the bottom of our PH rankings on account of subpar fundamental momentum and trends.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. In terms of valuation, the big imponderable remains dividends. Some banks have cut while others may follow suit at some stage. Income compensation is an important anchor for investing in a bank: this can be the argument for holding a Sberbank or a FAB or a cheaper Chinese SOE. We focus on Earnings Yield and Franchise Value. Bearing in mind value-quality performance, APAC and Europe come out on top. It was not that long ago that Greek banks stuck out like a sore thumb in terms of rock-bottom valuation. This is no longer the case.The concern is that there is a creeping "Japanification" of systems with rates lurching precipitously downwards. This is horrendous for banks, forcing them to chase for yield or fees from enticing new products of dubious merit. We can clearly see this "Japanification" in core Europe but also in markets as diverse as South Korea and possibly even Brazil. A MMT world of negative yields in the US is not now such a long shot: whatever the FED does, or the stock market for that matter, bond yields are instructive and need to be heeded. I have heard it said that banks are a 100-year lows versus the market. I have also heard the same argument apply to miners. Regarding banks, the market is pricing in more risk than opportunity beyond sporadic rally gyrations of a bear market. The problem is that there is more risk still to price. This applies to the US, Australia, Canada and Europe but also to those EM banks which also function as Sovereign Debt treasure troves of troubled nations scrambling for dollars.

Global Banks: Trends and Musings