Banks are Finally off the Naughty List

Hark! Is that Jolly Old Saint Nick, climbing quickly to altitude in the winter night sky?

No, it’s the yield curve.

Banks are finally positioned to be rewarded by Santa for being “good” boys and girls all year.

And by “year,” I mean more than a decade.

Fears of inflation and overheating labor markets have increased the likelihood of interest rate rises in the near-to-medium term, in what would be the reversal of a more-than-decade-long policy of low rates that has blighted banks, insurers, and the wider financial ecosystem.

Since 2008, the secular decline in rates has exposed complacent shareholders and management teams of incumbent businesses (who previously relied on rich margins and high leverage), creating an undervalued financial services sector ripe for transformation. For the value-oriented financial services operator-investor, there could not be a larger stack of boxes under the tree.

But, of course, life’s not all presents. The new year is just around the corner, with the clean feeling of a fresh calendar and, finally, some wind in the financial services sector sails to inspire some ambitious New Year’s Resolutions. And yet, while that rising-rate environment may provide a tailwind in European financials, active discipline will be needed to shed the holiday £’s (that’s “pounds” to my fellow native Texans) and adopt business models to this new competitive environment. A laser-focused operational approach will remain crucial to taking advantage of this once-in-a-generation opportunity and remaining resilient through the economic cycle.

The long-term winners of the future in the financial ecosystem will be those who, despite inflation charts’ trending more upward than to the right, nonetheless remain prepared for ‘lower-for-longer’ interest rate environments: a focus on fee income vs. margins or yields, controlling the numerator of cost-income ratios and not just the denominator, and maintaining underwriting restraint. The discipline and persistence found in fiduciarily responsible, transformational private equity investment will therefore be key to driving change and creating value in the financial services sector going forward. That is the only way that those lofty resolutions will actually carry on through the year.

And by “year,” I mean more than a decade.

About the Author:
Matthew DeWitt Hansen is the Founder and Chief Investment Officer at Financial Services Capital.
This article is not an offer to sell, or an invitation for an offer to acquire, an interest in any investment, nor is it an invitation to apply to participate in any investment. This Article is not an offering or placement of interests in any investment in any jurisdiction, and should not be construed as such.
Financial Services Capital is an Associate member of TEXPERS. The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of Financial Services Capital nor TEXPERS, and are subject to revision over time. 
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