Banks are poised to outperform their rivals in the financials sector following their dramatic recovery in the aftermath of the eurozone crisis, according to Polar Capital’s John Yakas.
The global banking sector rallied hugely in the second half of 2012 – especially in the West – after European Central Bank president Mario Draghi’s pledge to do “whatever it takes” to save the eurozone ended the tail-risk of financial collapse.
The MSCI World Banks index rose by 16.2 per cent in the second half of 2012, while the MSCI World index rose by 8.7 per cent – although some developed banks performed far better, with Lloyds rising by 54 per cent in the same period.
So far this year the banks have been lagging their peers in the financials sector such as insurance companies and asset managers, but Mr Yakas believes they are poised to outperform and is boosting exposure in his Financial Opportunities fund.
“Banks still look very attractive on a price-to-book valuation basis,” he said. “We are less than a third of the way through the rally in banks and there is a lot of potential for valuations to normalise.
“Going forward, without question the best opportunities in financials lie in the banks because valuations are so low. Banks have lagged a little bit and their valuations look better than other specialist financial firms.”
Mr Yakas has recently been adding exposure to banks with a focus on eastern Europe, particularly Austrian bank Raiffeisen, which he says has an extremely low valuation.
His reasoning is that investing in eastern Europe is a geared play on a recovery in western Europe.
The recovery in the European banking system is something Mr Yakas is geared fairly heavily towards in his fund, and he has been adding to this over the past six months.
“The issues are not resolved, but as time goes on the European banks are increasing their capital naturally,” he said.
“Many of the banks, for instance BNP Paribas, are now in quite strong positions, and there are opportunities in those stocks which have underlying profits that are very strong, such as BBVA in Spain, which is doing very well from its big Mexican business.”
The manager brushed off concerns that banks may never get back to the profitability they had pre-crisis because of stricter regulations and the need to hold more capital – which has led many analysts to believe the upside is limited.
Mr Yakas said concerns were based on the return on equity, which will not be as high as before, but that this wouldn’t stop them being as profitable, because “on a return-on-assets basis they will normalise, and that is a better way of looking at the banks’ balance sheets and profitability”.
However, one area of the banking sector that has not been living up to its potential is in emerging markets.
Mr Yakas said he had traditionally had a bias towards emerging market banks because they are focused on domestic lending and are a good way to play the emerging market consumer theme.
But the market has lagged recently, as have emerging market equities in general, and Mr Yakas has traded out of them into Europe and the US.
Focus turns to banks with new product
Polar Capital is set to launch a Global Financials investment trust for managers Nick Brind and John Yakas to further exploit the opportunities that Mr Yakas is seeing in the banking sector.
The trust will mainly invest in banks, which will account for roughly 70 per cent of the assets in the trust, with the rest spread between other financials firms such as insurance and asset managers.
When the trust is launched, the managers will focus particularly on opportunities in the banking sector in Europe and emerging markets, with the US and the UK likely to make up only 25 per cent of the portfolio.
The specialist asset manager is looking to raise at least £100m for the investment trust and plans to list it on the London Stock Exchange at the end of June.
The trust will be the third financials fund from Polar Capital, as Mr Yakas currently manages a Financial Opportunities fund and Mr Brind runs the Financials Income fund.
Both funds have performed strongly in the past year as the financial sector has rallied, with the Opportunities fund up 39.1 per cent and the Income fund up 34.4 per cent, according to data from FE Analytics.
The firm currently runs two investment trusts, the Polar Capital Technology trust and the Polar Capital Global Healthcare Growth and Income.
