In our recent Insight, “Why the Global Investment Banking Model is Under Siege” (March 24, 2016), we outlined the struggles facing the global investment banking sector. Hardly a week goes by without an important development for the likes of JPM, BAC, C, MS, GS, or in Europe, UBS, CSGN, DBK, BARC, be it the restructuring of business models, low returns, or additional regulatory pressures. Even in the most recent Q1 – which is typically seasonally strong – returns on equity were very low. For example, both Citigroup and Morgan Stanley reported an ROE of 6%.

At present, many U.S. large cap banks are being weighed down in no small part because of their exposure to investment banking, including: BAC (down 13% YTD), C (-11%), JPM (-4%), GS (-9%), and MS (-15%). In Europe, banks with global investment banking divisions are also down significantly, including BARC (-22%) and HSBA (-16%), as well as the Swiss banks, namely UBS (down 15%) and CSGN (-33%), who are facing a multitude of challenges (as we discussed in our Insight “Notes from Switzerland: Rising Regulatory Risk Places Pressure Swiss Private Banking Model Under Pressure” [January 6, 2016]).

As a result, to reduce HBG’s risk in terms of both earnings volatility and regulatory risk, we have sought to minimize our exposure to banks with global investment banking operations. Although valuations of these banks are low, and as a result, multiple expansion rallies are a possibility, the fact ROEs remain well below their cost of capital makes this more difficult. Lastly, the restructuring of the business models is ongoing, and will take years.

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.