Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

In <a href="https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved" target="_blank">https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved</a>, we set out to pinpoint banking assets with poor technical momentum, strong fundamental trends, and cheap valuations.We drilled into detail to find the most unfashionable and cheapest banks in the world. Using a combination of technicals, fundamental momentum, and franchise value, we ranked over 500 banks from the latest reporting season and allocate a score to capture relative attractiveness or ugliness. For fundamental momentum, we utilised our PH Score™. In some cases, most notably Turkey, the full weight of deterioration from FX and rate mismatch, under provisioning, and under reported asset quality erosion, has yet to flow into fundamental trends and metrics. So we added that caveat.<div class="content-highlight">Today, we add a risk screen (basically an implied CDS) to the original model to better capture risk-adjusted rankings of valuation, fundamentals, and technicals.</div>So what does our enhanced model show?<ul>
<li>Well, as one might expect, there is a greater weighting in the top quintile from lower risk US banks which offsets their low franchise valuation score.</li>
<li>There are far fewer "cheap" Japanese banks now in the top quintile given the elevated risk.</li>
<li>Most of the top names are the same. Even considering the higher implied CDS of Turkish, Russian, and South Korean lenders, their valuations and/or RSIs score are appealing while their fundamental momentum for now remains firm. (How long this will last in the case of Turkey is a mute point).  Their risk ratings, in some cases, are as stressed as Unicredito, Commerzbank, Chinese, Japanese, or Nigerian lenders. Does HSBC carry more risk than Sberbank?</li>
<li>At the other end of the spectrum, one finds Indonesian banks. While their risk may not be as high, their valuations and fundamental progression are subpar. They generally do not score well.</li>
</ul>In short, if you think that Brexit will not be as bad as it may appear (UK banks feature prominently) or that Turkey or Russia are oversold, or even investable, or that EM exposures at BBVA and Santander plus Raiffeisen and Erste are factored into the price, then opportunity knocks. The key is to weigh what things will look like in say 5 years. And to eschew the noise and herd mentality. Of course, Venezuela is a model of how not to do things. Let us hope the regional refugee crisis there will not be repeated in any of the high risk jurisdictions in the table below.

In https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved, we set out to pinpoint banking assets with poor technical momentum, strong fundamental trends, and cheap valuations.We drilled into detail to find the most unfashionable and cheapest banks in the world. Using a combination of technicals, fundamental momentum, and franchise value, we ranked over 500 banks from the latest reporting season and allocate a score to capture relative attractiveness or ugliness. For fundamental momentum, we utilised our PH Score™. In some cases, most notably Turkey, the full weight of deterioration from FX and rate mismatch, under provisioning, and under reported asset quality erosion, has yet to flow into fundamental trends and metrics. So we added that caveat.Today, we add a risk screen (basically an implied CDS) to the original model to better capture risk-adjusted rankings of valuation, fundamentals, and technicals.So what does our enhanced model show?
Well, as one might expect, there is a greater weighting in the top quintile from lower risk US banks which offsets their low franchise valuation score.
There are far fewer "cheap" Japanese banks now in the top quintile given the elevated risk.
Most of the top names are the same. Even considering the higher implied CDS of Turkish, Russian, and South Korean lenders, their valuations and/or RSIs score are appealing while their fundamental momentum for now remains firm. (How long this will last in the case of Turkey is a mute point).  Their risk ratings, in some cases, are as stressed as Unicredito, Commerzbank, Chinese, Japanese, or Nigerian lenders. Does HSBC carry more risk than Sberbank?
At the other end of the spectrum, one finds Indonesian banks. While their risk may not be as high, their valuations and fundamental progression are subpar. They generally do not score well.
In short, if you think that Brexit will not be as bad as it may appear (UK banks feature prominently) or that Turkey or Russia are oversold, or even investable, or that EM exposures at BBVA and Santander plus Raiffeisen and Erste are factored into the price, then opportunity knocks. The key is to weigh what things will look like in say 5 years. And to eschew the noise and herd mentality. Of course, Venezuela is a model of how not to do things. Let us hope the regional refugee crisis there will not be repeated in any of the high risk jurisdictions in the table below.  

Global Banks: The Last Song on the Dance Floor

Austria

Erste Group Bank AG is a global bank. The Bank accepts deposits as well as carries on activities in the retail, corporate, and investment banking sectors. Erste group has main operations in Europe, with headquarters in Wien, Austria.

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Erste Group Bank Ag (EBS AV)

Global Banks: The Last Song on the Dance Floor

In https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved, we set out to pinpoint banking assets with poor technical momentum,...

Paul Hollingworth

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