This scenario is bettered for UK banks because several have already demonstrated they have the capabilities to respond to a lower for longer interest rates environment through cost cutting initiatives. Lloyds, RBS and Barclays have responded to additional pressure on profits during the first half of the year by closing branches, changing management and spinning off unprofitable parts of the business.
But the success of UK banks’ ability to pull this off will vary, de Blonay said.
“If I put Barclays and RBS against each other, I suspect investors would prefer to go Barclays because they have delivered successes in shutting down the non-core division reducing its stake in Barclays Africa. Whereas there is an awful lot RBS’ CEO, Ross McEwan, needs to address. I think the market has been disappointed by the delivery but also the complexity of the company.”
He added: “I have to stress – I do not hold any of the UK banks in my portfolio today. I am speaking like someone who is looking and monitoring valuation levels and potentially contemplating post-Brexit volatility.”
Emerging Markets earnings growth
When it comes to investing in banks in the current climate, de Blonay says it is not so much about looking for value but rather earnings growth. One area he is finding such growth in is emerging markets banks.
“For an asset class that had been relatively forgotten about, emerging markets are becoming a strong candidate to benefit from the low interest rate environment,” he said. “There may be a growing fear that interest rates will go up aggressively in the US but no one believes they can go up significantly fast. Indian banks in particular are growing very fast. They are much more expensive to hold than other banks but they are typically growing at a faster rate.”
De Blonay also sees potential in financial services companies hailing from the Philippines, Indonesia, Hong Kong, Singapore and even China. “They are starting to show that they can continue to deliver fast growing earnings and still manage non-performing loans relatively well despite a stronger dollar.”
