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The banking industry as a whole, with the help of fiscal and monetary policy, has come through the pandemic quite well. Companies never lost money even though they posted large reserves.
While banks were hit very hard at the beginning of the pandemic, they have made a dramatic turnaround starting in the third quarter of last year. Performance 9/30/20 to current (4/28/21)*:
- S&P 500 Index +25%
- Overall Financial sector +51%
- Large banks +76%
- Regional and community banks +100%
Even with the recent run up, valuations for regional and community banks are still attractive, trading at:
- P/E of 14x., just 59% of the S&P 500 Index, which is trading at 24x.
- Median price to tangible book value of 1.7x, slightly below 2019 levels.
Certain companies and subsectors, including those in FinTech, or that are transaction-oriented or markets-related - companies such as PayPal, Square, Mastercard, BlackRock, or Goldman Sachs - have done exceptionally well during the pandemic.
Net interest margin, the spread between loans and deposits and a significant source of banks’ earnings, should rise over the next 3-5 years as the economy improves and the Fed allows interest rates to rise. Even a very small rise in rate will drive significant improvement in margins.
Pandemic-related loan losses have been far less than expected, and banks now have excess capital that can be used to acquire others, pay larger dividends, and/or buy back stock.
Bank M&A activity halted during 2020 but has surged in 2021. YTD there have been 53 deals announced with an aggregate deal value of $25 billion, which is on pace to return to 2016-19 levels.
FinTech and payment technology are high-margin businesses and will likely force positive change and consolidation within the traditional banking sector.
As the economy continues to recover, loan demand should pick up, allowing companies to significantly grow their portfolios and loan income.
The Hennessy Small Cap and Large Cap Financial Funds maintain highly concentrated, high conviction portfolios. They both have a high active share, and own just a fraction of the number of companies compared to their benchmarks.