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Banks present savvy value play through crisis fears and tech frenzy
It was just over a year ago that Silicon Valley Bank, a regional staple of the US financial services scene, collapsed after bond losses caused a run by depositors. It was a relative blip on the global economic radar, but when First Republic and Credit Suisse fell in the maelstrom fear of contagion spread like wildfire through markets.
Since then, inflation has been on a tear and the Magnificent Seven technology stocks have set indices ablaze. While inflation has been reigned in (but far from tamed), the share prices for Alphabet, Amazon, Apple, Meta Platforms, Microsoft and NVIDIA have continued to soar, with Tesla the only outlier.
What has gone largely unnoticed, however, is that a sizeable cohort of bank equities around the globe have also outperformed. Not only have many of these bank stocks thrived, but they’ve done so from a firmly attractive starting point after losing popularity during the mini-crisis, when fear permeated the market and observers fretted over the possibility that more banks would get caught in the run.
“That they have survived did not surprise us,” says contrarian investor Orbis Investments in a recent note, noting that most of its strategies were overweight quality non-US banks.
“Our core group was a diverse bunch, including Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group (MUFG), and Sumitomo Mitsui Trust Holdings in Japan; AIB, Bank of Ireland, and ING in Europe, and KB Financial, Shinhan Financial, and Hana Financial in Korea. All but MUFG are still significant holdings in at least one of our strategies, and all but Bank of Ireland have outperformed both world stock markets and world banks in local currency terms.”
Many of these banks stocks have been buoyed by the inflationary environment, Orbis explains, as higher rates have increased lending spreads. The return spectrum hasn’t been entirely uniform, of course. In Asia, for example, Japan has lagged due to ‘lower for longer’ rates while Korea has excelled. But the overall picture in Asian banking has been a net positive.
The performance of Korean banks, in particular, is a worthy example of the value stocks Orbis is identifying.
“To say that Korean banks are overlooked would be an understatement in our view,” the Orbis team states. “Currently trading at around half their book value, the banks are priced as if they are in the teeth of a perilous crisis. But when we look for the red flags that might signal distress, we see nothing of the sort. Banks in a crisis have shaky balance sheets, but our Korean banks are solid. Banks in a crisis may hold assets at inflated prices that need to be marked down, but that’s not so at the Korean banks. Banks coming into a crisis are often overearning, but our Korean banks aren’t sacrificing resilience to chase returns.”
Similarly, in Europe, while some corners of the investment community worry over the possibility of a return to near-zero rates or the spectre of regulatory pressure, the Orbis team sees pockets of potential upside.
“With reasonable interest rates, we believe our European banks can earn returns on equity well above 10 per cent over the long term,” the team notes. “And with little need to rebuild capital, they can pay ample dividends – Bank of Ireland, AIB, and ING offer dividend yields above 5 per cent.”
While the conditions for these banks have improved, the market is still wary, with the result a clutch of core bank holdings for Orbis that still trade at less than 8 times earnings.
“In our view, the banks are good illustrations of how contrarian investing works in practice,” Orbis states. “In a year that has seen a banking crisis on one side and a wave of artificial intelligence enthusiasm on the other, this handful of banks has managed to outperform.
“That is often how it goes – fear comes in loudly but goes out quietly, and the road from all-out fear to a shrug of the shoulders can be a very rewarding one for long-term investors.”
