Fund manager Insync cannot make a compelling case for investing in banks offshore (or locally).
It has been over 10 years since the Global Financial Crisis, and it has taken this long for the ROE to reach a post-crisis high. Importantly, the ROE has only exceeded the cost of equity twice in the 11-year period to 2017. Not really a foundation for investing in a business when they are generating a return less than their cost of capital!
Banks depend on leverage to a much greater extent than almost any other business. A 10 per cent equity to assets ratio for a bank is leverage of 10 in debt to 1 of equity. The problem arises when something goes wrong. Then a loss of just 10 per cent of the value of the assets means the shareholders’ equity is wiped out.
With the increasing complexity around banking financial statements with large exposures to over-the-counter derivative products, it is almost impossible to gauge a bank’s exposure to bad debts or credit risk, interest rates and currencies.
Australian banks have suffered a similar fate with major bank’s ROE at 23-year lows!
Conclusion: Poor and declining trends in profitability, high leverage and high risk of disruption are some of the key reasons why Insync does not invest in banks.
For information on where Insync is seeing better offshore investment results visit https://www.insyncfm.com.au/