What's Ahead for Financials

Dave Ellison and Ryan Kelley, Portfolio Managers of the Hennessy Large Cap Financial Fund and Hennessy Small Cap Financial Fund, believe it could be an opportune time for Financials when margins expand and loan growth resumes. 

March 2022
  • David Ellison
    David Ellison
    Portfolio Manager
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager

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Key Takeaways

•    A reduction of the Federal Reserve’s balance sheet coupled with higher interest rates provide banks the opportunity to expand their revenues, grow their margins, and focus on the value of their deposits. 
•    Bank valuations continue to look attractive: With a price to 2023 earnings of 10.5x, large-cap banks currently trade at a 40% discount to the S&P 500 Index’s 18.1x.
•    Due to their fast growth profiles, Fintech companies continue to trade at a premium to the market—approximately 25.0x 2023 earnings—but below their 10-year average of 37.7x.
•    Consolidation of banks will likely continue in 2022. We prefer to own the consolidators as there can be tremendous value creation and accretion to both earnings and the book value. 
•    We are seeing stronger loan production. Excluding the commercial and industrial category, loans outstanding at the largest 25 banks in the U.S. grew 6.2% and small banks’ loan balances rose 8.0% over the past year as of 3/18/22.
•    The industry is experiencing an exceptional period of asset quality. In 2021, nonperforming assets to total assets were 46 bps, down from almost 300 bps in 2009.  Aggregate net charge-offs to average loans were 24 bps for the year; in 2009, it was 267 bps.
•    As concentrated portfolios, the Hennessy Small Cap and Large Cap Financial Funds have an active share of 89% and 70%, respectively.3
•    Active management allows our experience to drive investment decisions, seek opportunities outside of the financial sector that are financially related, and only include those companies we believe will outperform the overall sector. 

1 Large banks are represented by the KBW Bank Index. Source: Bloomberg, as of March 21, 2022. 2 Fintech companies are represented by the KBW Nasdaq Financial Technology Index. Source: Bloomberg, as of March 21, 2022. 3 Relative to the Russell 2000® Index Financials and Russell 1000® Index Financials, respectively, as of December 31, 2021.

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