Because banks became weapons of mass economic destruction in the 2008 global financial crisis, post-crisis regulations sought to defang financial institutions through increased capital requirements.
Those measures greatly reduced their risk, but also lowered their financial performance.
Despite this, two portfolio managers at the boutique international value investment manager Causeway Capital Management are salvaging undervalued assets amid the wreckage in the bruised banking sector.
In a Causeway newsletter interview titled “The Banking Evolution,” portfolio managers Conor Muldoon and Alessandro Valentini say they have increased the sector’s weighting to 15% of their international and 10% of their global portfolios by purchasing shares of banks that have successfully shed capital-intensive assets and low-return business lines.
The two value managers explain their portfolio selection criteria, with Muldoon noting that “some of our favorite bank holdings have already raised sufficient capital and shed assets to meet the capital requirements of Basel III,” though that regulatory standard does not take effect till 2019.
Market consolidation is another key criterion, with Valentini saying that “fully capitalized banks generally operate in markets where the competition has shrunk to a few key players. In the United Kingdom, for example, the vast majority of retail banking market share is held by only four banks.”