Bank Fundamentals Continue to Improve
2 May 2017 by Mark Holman
With the Q1 earnings season well under way, one would be hard pressed to overlook the performance of the banks. With global default rates remaining exceptionally low, coupled with a rising US yield curve and ideal trading environments in the key fixed income, currency and commodities (FICC) sectors, it is no surprise that the banks have turned in such stellar results.
From a fixed income perspective the news is equally strong, if not better, as highly supportive markets have facilitated the stronger banks to generate capital organically, while also enabling even the weaker banks to raise equity capital, such as Deutsche Bank and Unicredito. In fact, within fixed income it has been the weaker banks that have outperformed, some materially. As a whole though the sector has been one of the best performers, with the CoCo sector of the market faring particularly well. In April the Bank of America Merrill Lynch CoCo index returned 2.5%, taking year to date total returns to just over 7%! Normally we are big advocates of active management, but in this case investors would probably have struggled to match the index as they would certainly have needed exposure to some of the weaker names, which understandably may have pushed the risk envelope just too far.
Having said that though, there were plenty of good opportunities away from the recovery stories and the outlook, in our view, remains good. Fundamentals are strong and the sector still has clear relative value, with average yields north of 5% for an average mid-BB rating.
If like us, you think that the ‘squeeze is on’ then investors will find themselves having to re-enter the market as, to-date, the price dip has just not happened; in which case this may not be a bad sector to look at.
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