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Banking on a sustainable recovery

03/22 GIB Asset Management By Mark Evans, CFA

Resilient banking in uncertain times

Banks are attracting significant focus through our current geopolitical crisis as they sit at the nexus of issues around long term growth, increasing central bank interest rates and of course their long term positive impact in society. We believe that many banks have improved their positive impact on society since the global financial crisis, increasing their resilience and better understanding their vital role in our economies. Although the share prices of banks have been volatile recently given the central role of financial sanction to the crisis, we hope this should protect the better performers though difficult and uncertain times ahead.

Finance as a Force for Good?

We look for institutions and management teams with a purpose to help make a positive difference to people’s lives, and who we judge are genuinely focussed on the financial health of the customers and communities they serve.

We believe there will be a growing role for high performing community-focussed banks that offer excellent customer service and are able to take advantage of scale and local credit knowledge. We conduct deep integrated analysis to map their impact on the real economy to value creation. For example, we look for data that shows the number and volume of loans to small businesses as a percentage of total loans and initiatives to offer access to the previously unbanked.

We also believe banks need to change and embrace technology and look for those who already have the size and development budgets to lead the analogue to digital transition without disadvantaging vulnerable customers.

Perhaps most importantly we look for management teams that are aligned with all stakeholders and instill a culture of operational and risk excellence. We strive to assess management’s performance in their current role, but also over their careers. This is one of the reasons for our investment in M&T bank last year.

M&T is a full service community bank operating in an area of the USA with unbanked rate of over 8%[1]. We believe their strategy combines the advantages of the community bank model, with empowered employees acting in customers’ best interests, with a modern infrastructure intended to provide high levels of service. Their positive impact derives from offering full community banking services, being ranked fifth in the USA for small business lending in 2020 and with 37%[2] of all mortgage loans in 2020 providing mortgage financing for affordable housing units with rent or income restrictions to help keep them below market prices.

They have delivered 14% annual compound growth in earnings since 1983[3] and have shown resilience being one of only two commercial banks in the S&P 500 at the start of the 2008 GFC to maintain a dividend through the crisis[4]. The current CEO was previously CFO from 2005 and 2016 and successfully navigated the GFC with the bank enduring lower loan losses than all peers[5].

Another one of our financial holdings, DNB Bank, is a Norwegian bank. It is a similarly high-performing bank, with a strong positive impact on society, in our view, and an extensive role in financing the energy transition. While it did not have any operations in Russia, Belarus or Ukraine, the conflict has highlighted the importance of DNB’s ability to manage risk and identify opportunities in a long-term perspective. Both DNB and its staff have contributed donations and campaigned for UNICEF Norge, to support the children of Ukraine.

In the insurance sector, we have an investment in Tryg, which is based in Denmark. Tyrg has also responded rapidly to the situation in Europe, and run a fundraiser which goes to the Red Cross's relief work in Ukraine[6], with staff donations supplemented by a corporate donation.

Our conclusion

We believe that the greatest profits can come from solving our greatest challenges. As we assess the difficulties of the current crisis and the challenges that lie ahead we look for resilient institutions that can look after their employees and customers in times of stress, and partner with them for positive impact and value creation over the long term. We believe there will be a growing role for high performing community-focused banks help to combat financial exclusion and other challenges, and this could turn them into powerful long-term investment opportunities.

[1] https://www.fdic.gov/analysis/...

[2] M&T 2020 ESG report

[3] M&T third quarter 2021 investor update

[4] Barclays Regional Banks analyst, November 2021 meeting

[5] Barclays Regional Banks analyst, November 2021 meeting

[6] (1) Post | Feed | LinkedIn

This content should not be construed as advice for investment in any product or security mentioned. Examples of stocks are provided for general information only to demonstrate our investment philosophy. Observations and views of GIB UK may change at any time without notice. Information and opinions presented in this document have been obtained or derived from sources believed by GIB UK to be reliable, but GIB UK makes no representation as to their accuracy or completeness.

Mark E 3

Mark Evans, CFA

Co-Portfolio Manager

Mark is a Portfolio Manager at GIB Asset Management. Mark is responsible for contributing to the research and analysis of new and existing sustainable strategies. He has more than 18 years of investment experience. Prior to joining GIB Asset Management, he worked from its launch on Jupiter Asset Management’s Global Sustainable Equities Fund and was previously an analyst on Jupiter’s Environmental and Sustainable Investment Team. He has also had investment roles with Citi Investment Research and M&G Investments.

Mark graduated with an MSc in Environmental Technology from Imperial College London and an MA degree in History from the University of Edinburgh. He is a CFA Charterholder.

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