In Q1 2019, the holdings in the Hamilton Capital Global Bank ETF (ticker: HBG) recorded portfolio-weighted EPS growth of a robust 12% Y/Y[1], supported by excellent fundamentals of U.S. banks (~60% weight) and a diversified portfolio of global banks (~40% weight). Encouragingly, the growth was strong and broad-based across nearly all regions, including U.S., India, Singapore, Norway and Austria. With global growth forecast to remain over 3.0% this year, the benefits of diversifying outside of Canada (with half the forecast growth) remain very strong.
Note to Reader: This Insight includes references to certain Hamilton ETFs that were active at the time of writing. On June 29, 2020, the following mergers took place: (i) Hamilton Global Financials Yield ETF and Hamilton Global Bank ETF into the Hamilton Global Financials ETF (HFG), (ii) Hamilton Australian Financials Yield ETF into the Hamilton Australian Bank Equal-Weight Index ETF (HBA); (iii) Hamilton Canadian Bank Variable-Weight ETF into the Hamilton Canadian Bank Mean Reversion Index ETF (HCA), and (iv) Hamilton U.S. Mid-Cap Financials ETF (USD) into the Hamilton U.S. Mid/Small-Cap Financials ETF (HUM).
The robust EPS growth in the quarter has supported HBG’s strong absolute and relative returns since inception. Since its 2016 launch, HBG has generated an annualized return of ~10.5%, despite absorbing three severe macro corrections (Brexit vote, yuan devaluation threat and last year’s recession fears). It also continues to generate substantial outperformance and is 18.5% ahead of the global banks[2].
Despite strong fundamental performance, the underlying holdings of HBG trade at a substantial discount to their 5 year averages (see below) offering the potential for multiple expansion as recessionary fears recede.
Strong and Consistent EPS Growth Across Most Regions
The chart below highlights the strong and consistent earnings growth of HBG’s holdings, underscoring the portfolio’s excellent fundamental performance driven by stock selection and geographical allocation.
In Q1, HBG’s strong EPS growth was broad-based across all geographies with 23 banks reporting EPS growth of 10% or higher.
The U.S. portfolio generated EPS growth of a healthy 12% even as the impact of the 2017 U.S. tax reforms waned. An emphasis on higher growth states and metropolitan statistical areas helped support the EPS growth in the quarter. It is also the reason why the U.S. portfolio of HBG has experienced higher EPS growth than the U.S. large-cap banks every quarter since inception (12 quarters overall). We continue to believe that consolidation in the U.S. mid-cap banking sector is likely to accelerate in the next two years and with over 20 U.S. mid-caps in HBG, we are optimistic this trend will be beneficial to unitholders.
Benefits of global diversification were evident across other major markets, most prominently Asia (India and Singapore), Norway and Austria. Across nearly all major global economies, credit quality remains robust and credit environment is expected to remain benign. In India, credit normalization (and declining provisions) continued to drive bank profits higher.
The global banking sector continues to trade at large valuation discounts to five-year averages, offering the potential for multiple expansion. With the current holdings of HBG trading at ~11.0x P/E, a nearly ~15% discount to their five-year average, we believe the global banks represent a very strong risk/reward while providing diversification.
Notes
[1] This figure is with ~91% of HBG having reported and assumes remaining holdings report EPS equal to consensus. As of the time of writing this note only four banks had not reported the corresponding calendar quarter, including two Canadian and two Japanese banks. Australian banks report semi-annually.
[2] The KBW Nasdaq Global Bank Net Total Return Index, GBKXN, in Canadian dollars through April 30, 2019.
[3] Portfolio weights as of April 30, 2019.
[4] GDP data is a blended forward 12 month forecast of annual estimates. Data prior to September 30, 2014 uses actual GDP growth (versus market forecast).