Digital related investment opportunities in Banks (retail and global)
For roughly one year, the relative performance of global players in the financial markets has been flat. Now, a cautiously positive view on banks is warranted, yet future performance will not be driven by the broad application of new technologies e.g. the implementation of large digital applications, which would thereby improve operating efficiencies, but rather by improved credit quality, especially in the peripheral markets of the European Union. It’s expected that banks will only deploy highly digitalized strategies after 2018.
In general, banks closely follow economic stewardship and since a substantial improvement in the macroeconomic environment can be expected, low quality assets have more upside potential than high quality assets. From a risk classification point of view, banks are presently regarded as low quality assets by the market.
For retail and global banks, the digital opportunity is vast as it ranges from the application and implementation of granting overdraft facilities, handling mortgage and credit card applications, as well as asset allocation tools. Less complex operations such as local and international payments (in and out) as well as cash transactions are already largely developed and on offer.
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| Banco Bilbao Vizcaya Argentaria | BBVA | Spain | ||
| Investment case: BBVA is a global bank focused on retail operations in Europe, the Americas, and Asia. Given this, it should be able to implement large scale and global digital opportunities for its clients. In the past, BBVA has proven its capacity to perfectly integrate acquisitions, as well as its ability to execute projects, while keeping operational costs in check at the same time. BBVA’s efficiency ratio (non-interest expenses/revenues) is below 60%, which is highly positive for a global player. | ||||
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| Vontobel | VONT | Switzerland | 16 % | 5.74 |
| Investment case: Vontobel is running the digital service “Deritrade”, which is a platform for structured products. In this field, the company is among the leaders. The platform is available to its own clients, to external asset managers and also to other financial institutions. In the latter segment, Vontobel has been able to win a number of key clients. The bank’s valuation looks attractive, especially after the break-up of the collaboration contract with Raiffeisen Bank. Additionally, dividends are expected to steadily increase, enhancing the already attractive dividend yield. | ||||
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| Barclays | BARC | United Kingdom | 30 % | 5.34 |
| Investment case: Barclays is a UK-based financial group, engaged primarily in retail, SME banking and credit cards. An appropriate restructuring of its client facing and middle office services could bring about substantial improvements in terms of efficiency ratios (which are presently among the higher ones). In the immediate term, equity performance will be driven by better economic conditions and from improving asset quality and growth prospects. In addition, the restructuring of the investment banking arm could be a potential trigger for good equity performance. | ||||
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| BNP Paribas | BNPP | FRance | 19 % | 5.46 |
| Investment case: BNP Paribas is a global commercial bank. Its key markets are France, Belgium, Italy and Luxembourg, but it is present in over 75 other countries. BNP has already developed low-cost access to the wholesale market and this provides a key advantage against its competitors. A further development of its digital strategy is feasible, and therefore it could emerge as a winner in delivering digital banking services. | ||||
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| Citigroup | C | USA | 19 % | 5.89 |
| Investment case: Citibank is a global diversified financial services company. It does business in more than 160 countries, it has approximately 200 million customer accounts and employs about 260,000 full time staff. In this context, the digital opportunity is enormous, but for the time being Citigroup is still dealing with legacy issues (deleveraging and winding down Citi Holdings). | ||||
| Company | Ticker | Country | Upside Potential | Sharpe (FY01) |
| HSBC | HSBA | USA | 82 % | 11.29 |
| Investment case: HSBC is one of the world’s largest commercial banks. Its operations can be found across Asia and Latin America, in the US, France, UK, and Canada. It is currently focusing on building a strong Asian franchise. The roll out of digitalized services should be viewed positively in this tech savvy region. In fact, the take-up rate of digitalized services is higher in Asia than in Europe or in the US. This bodes well for HSBC, with the Asian market expected to generate above average growth. Finally, the bank has a sustainable dividend policy supported by strong underlying earning power. | ||||