Polar Capital Global Financials Trust Plc GBP · LSE:PCFT
Polar Capital Global Financials Trust Plc GBP — Polar Capital Global Financials Trust — Shareholder Meeting (April 2019)
36 slides from Polar Capital Global Financials Trust Plc GBP's shareholder meeting presentation, Apr 11, 2019
Slide 1: Polar Capital Global Financials Trust (PCFT) AGM Presentation
Polar Capital Global Financials Trust (PCFT) 11 April 2019 AGM Presentation Nick Brind and John Yakas This presentation is for use with non-US investors only www.polarcapital.co.uk For non-US investor use only. Please refer to the Important Information at the end of this presentation. 1 10/04/2019
Slide 2: Award-winning Financial Team
Award-winning Financial Team Financials are the largest sector at 17.1% of the MSCI World Index1 • 20+ year track record of running financial sector funds (approx. $2.3bn under management) • Strong and stable investment team (4 fund managers, 3 analysts) • Excellent long-term track records in divers
Slide 3: Polar Capital Global Financials Trust (PCFT)
Polar Capital Global Financials Trust (PCFT) Launched to provide a lower risk exposure to the sector • Launched 1 July 2013 with fixed life to May 2020 • Dividend yield of 3.3%1 • Revenue reserves of 2.1p per ordinary share • £30m loan facility with ING Bank • Unquoted investment into Atom Bank Sour
Slide 4: Sector Lagged Since Launch
Sector Lagged Since Launch But outperformed UK banks and competitor funds since launch PCFT NAV 65.1% Benchmark: MSCI World Financials & Real Estate Index 65.6% Peer Funds: Lipper Financial Sector Average1 47.9% UK banks: HSBC Holdings 25.4% Lloyds Banking Group 14.1% Royal Bank of Scotland -7.8% Ba
Slide 5: Discount To Net Asset Value
Discount To Net Asset Value Driven by sentiment and performance • Discount widened as sector underperformed but since narrowed • Bought back 4.25m shares for cancellation • Fixed wind up date in May 2020 • Intention to offer a follow on vehicle PCFT Premium/Discount1 15.00% 10.00% 5.00% 0.00% -5.00%
Slide 6: The Financial Sector Then And Now
The Financial Sector Then And Now • 10 years since the financial sector reached a low • Banks have materially lagged • But they remain the largest sub-sector • Their recovery is critical to full recovery of sector Sub-segment breakdown1 Sub-sector 10 year performance2 3.5 80% 71% 70% 3 62% 60% 2.5 5
Slide 7: What Happened In 2018?
What Happened In 2018? Macro concerns have outweighed interest rate benefit? • Slowing economic indicators • Withdrawal of liquidity by central banks • Italian and UK politics/emerging market weakness • This all offers an opportunity US 10-year yield vs US banks relative to S&P 5001 Index 2018 total
Slide 8: Why Buy Financials Now?
Why Buy Financials Now? Sell-off provides opportunity • Strong balance sheets • Capital return is considerable • Few signs of cyclical stress • Cost-cutting and M&A potential 1.5% 1.5% • Opportunities in fintech and emerging 2.0% markets 2.0% 2.0% • Exceptionally low valuations • Reset rate expectat
Slide 9: Margin Outlook Not As Negative As Assumed
Margin Outlook Not As Negative As Assumed • No further US rate rises will stall margin expansion but outlook more complicated • Lower risk balance sheets supportive for risk adjusted NIM outlook • Steepness of yield curve a key determinant • Consensus on US banks assumes zero rate hike outlook and n
Slide 10: Loan Growth Is Lagging
Loan Growth Is Lagging • We visit hundreds of banks in the US, Europe and Asia • Loan demand weak relative to GDP growth • Lagging compared to pre-2008 period • Banks and regulators risk appetite impacted Loan growth lagging nominal GDP growth1 US bank loan growth remains weak2 16% 14% 14% 12% 12% 1
Slide 11: But Some Good News In Loan Demand
But Some Good News In Loan Demand • Small banks doing much better • Is the bond market and private loan market impacting large banks? • Some pockets of regional and sector growth • Rising rates may help boost loan demand Small US banks materially outperforming large banks1 Outstanding corporate secu
Slide 12: Capital Significantly Stronger
Capital Significantly Stronger • New regulatory environment in place • Capital ratios continue to rise • Some tweaking of regulations European bank Tier 1 & equity/assets1 Equity/assets and Core Equity Tier 1 Ratio2 18% 14% 16% 12% 14% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 1934 1937 1940 1943 19
Slide 13: Capital Return Is Considerable
Capital Return Is Considerable • Lower risk means more capital return potential • Little loan growth means banks returning cash • Payout ratios rising • Further restructuring ahead Capital return expectations (US)1 US banks total gross payout ratio2 8% 7.3% 7.1% 105% 7.0% 7.0% 110% 7% 6.5% 6.2% 6.0%
Slide 14: Few Signs Of Balance Sheet Stress
Few Signs Of Balance Sheet Stress • Few debtors getting into trouble (but lagging statistic) • Some specific areas of stress (emerging markets and energy) • Southern Europe seeing particular improvement • Regulatory regime more rigorous Trends in non-performing loans in the US1 Implied peak loan los
Slide 15: Why We Think This Time It Will Be Different
Why We Think This Time It Will Be Different • Investors focusing on exceptional 2008 crisis rather than 2001 • Little loan growth is arguably best indicator • Riskier lending has disintermediated to bond/private loan/fintech markets • Regulations, regulations and regulations Loss absorbing capacity
Slide 16: Cost Cutting Potential
Cost Cutting Potential • Technology is enabling branch closure • Short-term lower branch costs partially offset higher staff costs & IT • Key issue is will revenues be affected • Nordics a good example of potential DNB branch numbers v cost/assets1 Banks can reduce costs by promoting mobile2 500 1.3
Slide 17: FinTech – Don't Assume Banks Not Reacting
FinTech – Don’t Assume Banks Not Reacting • Upgrading digital distribution so structural positioning not as weak as assumed • Considerable spending on IT/control of customer relationships/control of deposits • Fintech models are untested and often rely on regulatory arbitrage • Preferred segment is
Slide 18: Merger And Acquisition Activity Is Restarting
Merger And Acquisition Activity Is Restarting In the US there are still over 5,000 banks • Europe significant consolidation post financial crisis • Recent activity mostly centred on small banks • In the US expect consolidation to pick up sharply US banking M&A by assets (US$bn)1 European bank M&A si
Slide 19: US Industry Valuations Remain Attractive
US Industry Valuations Remain Attractive D&P P/C (re)insurance composite price to stated book value1 230% Commercial lines pure rate increases peak near 50% 210% World Trade Industry P/BV 190% Cheating phase Centre 138% "bubble" Subprime/Credit hits 170% Rates "roll" Post Election Rally M&A Premium
Slide 20: US Commercial Insurance Pricing Firming
US Commercial Insurance Pricing Firming • Barclays interviewed 50 large company corporate risk managers. 70% of respondents expect price increases up from 54% six months ago which is the highest level in five years • All of those surveyed said the commercial P&C market is broadly stable. No responde
Slide 21: Asset Managers
Asset Managers No longer growth companies? • Pressures on fees from passives etc • Passives share continues to grow • Growth in alternatives • MiFID II Forward valuations express concern around asset 5 year share price performance (US$ total return)1 managers growth outlook2 Blackrock 64.3% Franklin
Slide 22: Emerging Markets – Attractive Structural Themes
Emerging Markets – Attractive Structural Themes • Attractive structural story for incumbents and fintech • Alternative to consumer stocks in EM • More profitable, more dominant, more regulated • Focusing on India Asia proportion of global middle class spending (PPP, %)1 Housing – Mortgages as % of G
Slide 23: US And European Banks Valuations
US And European Banks Valuations • Significant fall in valuation after crisis • Some recovery but still cheap against market • Dividend/buybacks to support recovery • Share count falls further boost EPS growth US banks price-to-book vs market1 European banks price-to-book vs the market2 4.0 3.0 3.5
Slide 24: Have They Bottomed?
Have They Bottomed? Banks have significantly derated • Earnings estimates little changed for US banks • European banks have seen some negative earnings revisions • Share prices have fallen further than change in earnings estimates • Fundamentals do not yet suggest significant negative earnings revis
Slide 25: Have We Bottomed?
Have We Bottomed? • Banks discounting slowdown/recession • Have often outperformed at this point in cycle • Balance sheets materially stronger so less downside risk • Will need macro data to stabilise European banks yield above where the sector has bottomed in the past US banks often outperform duri
Slide 26: Polar Capital Global Financials Trust
Polar Capital Global Financials Trust Sector exposure (%) Top 15 holdings (%) JPMorgan 5.1 Banks 59.2 Bank of America 3.7 Insurance 14.4 Mastercard 3.1 Fixed Income 7.7 Chubb 3.1 Arch Capital 2.4 Diversified Financials 7.6 Sumitomo Mitsui Financial 2.3 Real Estate 4.0 Citigroup 2.3 Marsh & McLennan
Slide 27: Co-Fund Manager: Nick Brind
Co-Fund Manager Nick Brind Nick Brind joined Polar Capital following the acquisition of HIM Capital in September 2010 and is manager of the Polar Capital Income Opportunities Fund and Co-Manager of the Polar Capital Global Financials Trust Plc. He has 25 years’ investment experience across a wide ra
Slide 28: Co-Fund Manager: John Yakas
Co-Fund Manager John Yakas John Yakas joined Polar Capital in September 2010 and is the Manager of the Polar Capital Asian Opportunities Fund, Polar Capital Financial Opportunities Fund and Co-Manager of the Polar Capital Global Financials Trust Plc. John has 30 years’ experience in the financial se
Slide 29: The Investment Team
The Investment Team George Barrow – Fund Manager George Barrow joined Polar Capital in September 2010 and works closely with John Yakas on the Polar Capital Financial Opportunities Fund and the Polar Capital Asian Opportunities Fund. With over 11 years’ experience as an analyst, George has built-up
Slide 30: The Investment Team
The Investment Team Nick Martin – Fund Manager Nick has worked on the Fund since 2001 when he joined Hiscox plc. He participated in the management buyout of Hiscox Investment Management in 2007 when the business was renamed HIM Capital Ltd. He has developed a broad knowledge of the insurance sector
Slide 31: Appendices
Appendices For non-US investor use only. Please refer to the Important Information at the end of this presentation. 31
Slide 32: Large US Banks: Cheaper But Same Profitability
Large US Banks: Cheaper But Same Profitability Same profitability, lower risk, so further upside ahead Revenues But Balance sheet Profitability Gearing So ROE ~10% fall under costs quality has back to pre- has has in pressure cut improved crisis fallen fallen valuations Loan Loss Revenues/Assets Cos
Slide 33: Credit Markets – AT1 Bonds Fell 11% In 2018
Credit Markets – AT1 Bonds Fell 11% In 2018 21 Pricing in lower risk • Spreads have widened in 2018 from very tight levels • Fundamentals remain solid • Rising government bond yields • Outflows from some bond funds Spreads recently widened1 European bank AT1 index total return2 1200 30% 25% 1000 20%
Slide 34: European AT1 Market
European AT1 Market Driven by event risk? • Deutsche Bank and Italian banks outliers • No differentiation for banks with higher Maximum Distributable Amount (MDA) • Extension risk now being priced in European US$ AT1 securities spread to call vs years to call 1000 MDA Colour Code*: 900 0-99 bps 100-
Slide 35: Important Information
Important Information Polar Capital 16 Palace Street London SW1E 9JD Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion it shall not and does not constitute an offer or solicitation of an offer to make an investment into any f
Slide 36: Important Information Cont.
Important Information Cont. Polar Capital 16 Palace Street London SW1E 9JD Regulatory Status: Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK FCA and is registered as an investment adviser with the US Securities & Exchange Commission (“S
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