The duo noted that US banks, for example, now hold more capital – defined as equity relative to total assets – than at any time since the 1930s.
‘We would argue that the significant amount of capital that the sector has raised since the crisis or generated organically through retained earnings puts it on a much firmer footing,’ Yakas (pictured) and Citywire A-rated Brind stated.
On the prospect of interest rate hikes prompting loan defaults and therefore eating into that capital, the Polar pair take the view that this would be ‘more than’ offset by higher margins on lending.
‘As capital continues to build then, if loan growth does not pick up materially, banks will have little choice but to increase payout ratios further, whether via dividends or buybacks,’ they concluded. ‘For some banks this will be material.’
The Polar Capital Global Financials trust launched in July 2013. Over the past year it has returned 2% in net asset value terms, while the FTSE World index has gained 6.5%.
‘In the very short term, financials have lagged the rise in equity markets,’ Yakas and Brind acknowledged.
‘It is most likely that a large part of this reflects investors’ caution towards equity markets following their recent strong performance, but also specific negative news at a small number of banks.
‘With valuations for the sector still historically low, particularly so for European banks and, with little credit being given for the significant improvement in banks’ balance sheets we remain very positive on the outlook.’
Yakas has a longer track record on the open-ended Polar Capital Financial Opportunities fund, which has returned 27.7% over the past three years compared with 26.3% from the MSCI World Financials index.
Brind's Polar Capital Income Opportunities, which was recently renamed from the Financials Income fund, has returned 37.6% through the same period.