Following a string of decent bank earnings last week, the risk level of the portfolio was increased. We are now back into a heavy Financials sector overweight.
The reason is that we feel that the banking situation has stabilised, while most bank shares have not recovered the losses they suffered in March after the Silicon Valley and Signature Bank collapses. If bank earnings continue to come in strong, we believe bank shares could bounce.
US banks tend to report earnings before European banks. There are four big banks in the US – JPMorgan, Bank of America, Citigroup and Wells Fargo. Two of them – JP and Citi – have already recovered their March losses because they positioned themselves successfully for a rising interest rate environment and have few unrealised losses on their balance sheets.
The other two big banks, Bank of America and Wells Fargo, also posted decent Q1 earnings, but since they have more unrealised losses on their balance sheets than JP and Citi, their shares are down around 10% since March.
Smaller (“regional”) banks in the US have suffered more. One regional bank, $USB (US Bancorp), made a brief appearance in the portfolio last week after its earning release. However, this position was quickly liquidated following unexplained losses over the next few days. On the weekend, we learned that $USB was subject to a report alleging the bank had a capital shortfall. The stock is now too risky to be included in the portfolio.
In Europe, $BKT.MC (Bankinter) started the European bank earnings season strongly. The shares fell, but we continue to hold them because we think the reaction was too harsh. Bankinter is one of the most profitable banks in Europe and the valuation at 7x 2024E earnings appears too low given the quality of the company.
$DBK.DE (Deutsche Bank Aktiengesellschaft), a new portfolio position, will report Q1 earnings this week. Deutsche shares fell sharply in March after doubts were raised about the bank’s stability. The situation seems to have improved since and the shares trade at an extremely depressed valuation of 5x 2024E earnings.
Overall, the portfolio now has a heavy tilt to Financials, which we believe trade at valuations that are too low.
This is a risky allocation in line with our strategy of “higher risks for higher returns”.
Pan American Silver, Suncor, Roche and the JPMorgan Emerging Market Bond ETF were sold. NN Group, Deutsche Bank, NatWest and Equitable Holdings were bought.