November 16, 2016

In the Hamilton Capital Global Bank ETF (HBG;TSX), we expect U.S. banks, over time, to represent between 35% and 50% of the fund. With expectations for a higher U.S. Fed Funds rate in the coming year, our bias is to be closer to the upper band of this range, at the expense of exposure to the Canadian banks. Within the U.S., we favour mid-cap banks over their larger peers because they (1) are growing faster, (2) are more rate-sensitive, (3) have lower regulatory risk, and (4) are merging. (For more on the issues facing the four mega-cap banks, see our November 7th HBG Manager Comment entitled “U.S. Banks: C, JPM, BAC, and WFC Continue Multi-Year Trend of Close to Zero EPS Growth”).

Attractive yield

The U.S. holdings in HBG recently finished reporting Q3 2016 results, and this quarter highlighted – again – how stark the differences are between these groups of banks. HBG’s holdings outperformed expectations, exceeding earnings-per-share (EPS) estimates by 5.4%[1]. In fact, EPS growth for the U.S. bank portfolio was 19% year-over-year, beating the earnings growth of the universals (+9%, aided by trading and a weak Q3-15 comparable), large regionals (+7%), and small/mid-cap banks (+10%)[2].

The EPS outperformance in HBG’s U.S. bank portfolio was driven by top line growth. Although net interest margin (NIM) was fairly stable for the HBG’s holdings, down only 4 bps year-over-year, the large growth in loans led to a 25% increase in net interest income. We do anticipate margin expansion once the Fed Funds rate begins to rise/normalize. This strong revenue result was also supported by a 29% increase in non-interest income (i.e., commissions and fee income), which compares very favourably to the 11% growth for the sector and 2% for the universals.

Overall profitability remains strong for HBG’s U.S. holdings. After adjusting for one-time acquisition expenses, the weighted-average ROE for the positions was over 10%, increasing by 40 bps year-over-year. This compares positively to the median ROE for the four universals (C, JPM, WFC, and BAC) of 8.8%, which declined by 38 bps from Q3 2015.


[1] Portfolio and weights as of October 11, 2016. All figures for HBG’s U.S. holdings on a weighted-average basis. Analysis excludes holdings added after they had reported earnings. Source for HBG’s EPS figures: Bloomberg.
[2] Source: KBW. Median figures for 218 publicly-traded banks covered by the firm.

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.


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