‘Following the herd’, ‘being an ostrich’ or ‘simply not understanding’. That’s a pretty negative start to an article!
In most cases, all of the above apply when either financials or banks are mentioned. 9 March 2019 marked 10 years on from the post-crisis valuation lows for the US, European and UK banks, with the world’s largest sector – around 17% – still largely shunned by investors.
Around 65% of the financials sector is banks. This is a diverse global sector offering many opportunities outside the UK problem children and their troubled Italian counterparts.
The vast majority have considerably recapitalised, reduced risk and reigned in their lending books. As a result, the banks are generating excess cash and returning capital via increasing dividends and share buybacks. Yet banks’ valuations are pretty close to the valuations that they had 10 years ago and, even if we are in a slowdown, multiples of 9x with utility-like characteristics seem attractive.