Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Thematic (Sector/Industry)

Australia Financials / Thematic (Sector/Industry)

<ul><li>Evidente has published a number of posts recently recommending that investors take a long position in Australia's major banks.  Relative expected returns from banks have increased as banks are trading at a significantly larger discount to non-banks by historical standards.  While the profitability of the banking sector has dropped substantially in recent years associated with higher capital adequacy standards, so has the aggregate ROE for the non-banks.</li><li>In this post, we re-visit this thematic and draw on recently published analysis by the RBA on trends in banks' profitability and cost of equity.  The central bank shows that the sector's cost of equity has remained broadly stable at the same time that the risk free rate has declined substantially, suggesting that the implied risk premia for banks has increased.</li><li>What the RBA's analysis reveals is that the lift in the risk premia has been more pronounced for the banks than non-banks, presumably because banks have higher betas.  If the process towards normalisation of the equity risk premium that commenced in mid-2016 continues, the CAPM suggests that high beta stocks such as banks should continue to benefit.  Further, bank stocks should re-rate as the market learns gradually that lower gearing  ought to be associated with a lower cost of equity, so that shareholders - not just bank creditors - benefit from safety.</li></ul>

Evidente has published a number of posts recently recommending that investors take a long position in Australia's major banks.  Relative expected returns from banks have increased as banks are trading at a significantly larger discount to non-banks by historical standards.  While the profitability of the banking sector has dropped substantially in recent years associated with higher capital adequacy standards, so has the aggregate ROE for the non-banks.In this post, we re-visit this thematic and draw on recently published analysis by the RBA on trends in banks' profitability and cost of equity.  The central bank shows that the sector's cost of equity has remained broadly stable at the same time that the risk free rate has declined substantially, suggesting that the implied risk premia for banks has increased.What the RBA's analysis reveals is that the lift in the risk premia has been more pronounced for the banks than non-banks, presumably because banks have higher betas.  If the process towards normalisation of the equity risk premium that commenced in mid-2016 continues, the CAPM suggests that high beta stocks such as banks should continue to benefit.  Further, bank stocks should re-rate as the market learns gradually that lower gearing  ought to be associated with a lower cost of equity, so that shareholders - not just bank creditors - benefit from safety.

Re-Visiting Bank Capital and Profitability - Who Benefits from Safety?