Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
The 3-6-3 Rule
Bank managers used to operate on the 3-6-3 rule: borrow at 3%, lend at 6% and be on the golf course by 3pm. Ultra-low interest rates and QE has pushed down the spread between the cost of borrowing and lending which has had a detrimental effect on their net interest margins. Rising bond yields relieve this pressure, and this combined with far fewer fines, an easing of the regulatory environment and cost cutting means that earnings are growing again.
Another key feature of banks is that their balance sheets are considerably stronger than they were before the financial crisis. The Federal Reserve in the US carried out a stress test last month which was passed by all 34 institutions and has been followed up by announcements from the big six banks that they will increase payouts by nearly $100bn, an increase of nearly 50% since last year’s test.
Finally, financials are one of the very few sectors to be trading at a discount to their historic valuations – at 1.1 times book value compared to the 30 year average of 1.7 times.
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