Investment Desk Bulletin

15 March 2016

Banking on financials

IDB 15 03 16

By Sanjay Joshi

Financial debt has been a central theme of our investment portfolios for some time. In the past four years financial bonds have performed robustly, but at the start of February a series of concerns triggered a period of extreme volatility, particularly in Europe. In this week’s IDB webinar we revisit these risks and outline why we are still happy to bank on financials.

- The risk of coupon suspension on CoCo debt has been overstated. The European Banking Authority has subsequently confirmed that no hard restrictions will be placed on banks to suspend coupons and that AT1 debt investors deserve particular protection.

- The fear that negative interest rates will translate into weak bank profitability would seem to be at odds with the trend in European Bank net interest margins, which have been rising and not falling.

- Economic growth is sub-par, but a scenario where bank profitability is impacted by recession is unlikely. Similarly energy losses are not a big risk to European bank profitability and balance sheets.

- We believe the investment case for banks remains intact despite recent volatility. The regulatory framework will continue to evolve, urging banks to raise bother the quality and quantity of their capital.

Please click here to view the presentation.