Having reached something of a post-crisis peak a year ago, the MSCI AC World Financials index has since followed a more unnerving path, characterised by wild swings in volatility so far in 2016.
Unsettling investors even more is recent speculation around the health of some the biggest global investment banks with analysts quoted in the Financial Times predicting tough first-quarter trading woes for the likes of Goldman Sachs and Morgan Stanley as China, oil prices and Fed policy upset growth expectations.
Banks traditionally have low returns on equity – with bonuses for staff arguably taking precedence over rewards for shareholders – with low barriers to entry and are undoubtedly weighed down by increased regulation.
However, there’s another side of the story with signs that selective banking names have actually made huge strides in actually staying out of trouble and, equally important from an investment perspective, remaining below the trading radar.
“We’ve seen Scandinavian banks – Swedbank and Svenska Handelsbanken – which are almost like utility banks which make a pretty predictable return every year; they are not taking crazy risks but are doing their job and what’s expected,” says Peter Michaelis, head of investment for Alliance Trust Investments.
“Some of the UK banks are becoming like that. Lloyds, for example, is going a long way to being a utility bank. It is dealing with legacy issues around PPI, but the whole remodelling that the CEO has pushed through suggests they are not afraid to be boring and dependable – take in deposits and make loans and mortgages and make a margin on that.”
Michaelis suggests that market volatility has indeed brought some financials names down to very cheap multiples, despite delivering stronger earnings.
Lloyds, which he owns in UK strategies, surprised all with its £2bn dividend pay-out in February despite a tough Q4 2015.
He concludes: “I’ve been watching banks for the past decade and they’ve been remarkable in their ability to surprise in terms of the fines they get and the mis-selling they are done for, so it has been hard as an investor to have faith in what they do. But their outcomes should improve massively.”
