Financials Unshackled Issue 1: Announcing Financials Unshackled

An occasional independent newsletter from SeaPoint Insights on key themes in Banking & Specialty Finance, most particularly focused on UK & Ireland but also with a wider European / Global remit

The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer

Why I am launching a newsletter

Following 25 years of professional experience - with a predominant emphasis on the banking industry since 2010 - I decided to leave my role as a UK/Ireland Banking & Specialty Finance institutional equity & fixed income analyst in March 2024. I very much enjoyed my time as an analyst - digging deep into sectoral and company issues; debating with institutional investor clients; engaging with the listed banks as well as many unlisted banks, non-bank lenders, fintechs, PE owners, etc.; building a network with the wider industry including the media, industry bodies, and other relevant players; and working closely with the internal desk. I was known for deep quality analysis, differentiated perspectives, and for honestly calling things as I saw them in the analyst role.

I’ve had a long-held personal ambition to set up my own business. So, I incorporated Seapoint Insights Limited (SeaPoint Insights) in July 2024. Following a few slow Summer months and with the onset of September and the ‘back to school’ mentality it brings, it is high time to re-immerse myself in the industry - with a first step being the launch of this independent newsletter as a medium for publicising my reflections on sectoral developments and key themes, which I continue to actively follow and think about.

What you can expect from this independent newsletter

This newsletter is starting its life as an occasional independent publication exploring select developments in banking & specialty finance, predominantly focused on the UK & Ireland but also with a broader European & Global remit. It is intended to be a weekly piece (though I will likely distribute occasional perspectives from time to time as well). But let’s see how it goes as I put pen to paper and gather reader feedback! So, it is essentially a ‘pilot newsletter’ for now.

I am deeply committed to ensuring that the views expressed in this newsletter are carefully considered, honest, impartial and unbeholden to any agenda at all times - hence, ‘Unshackled’.

It is an interesting time in the Financials space

Global Context: In a global banking context the sector is, broadly, on a much more consistent stable footing (US 2023 liquidity crunch and some other largely isolated negative events (e.g., Credit Suisse) aside) since substantial recapitalisation efforts and the tightening of regulations and risk management in response to the GFC - and valuations have thankfully recovered (somewhat…) as rates have picked up from ground zero, with improved investor interest evident in recent years.

Indeed, while the strongest players have become even stronger since the GFC (despite ‘Too Big To Fail’ related policy concerns in its aftermath), interesting new digital players focused on leveraging low cost operating models and service quality innovation with disruptive ambitions are emerging all around the globe (albeit there are substantial differences across the globe in terms of what model the prevailing financial architecture in particular jurisdictions supports). However, it remains to be seen how impactful these emerging players will be on the banking landscape in developed markets particularly.

UK Context: In a UK-specific context, while the mainstream lending market is highly fragmented, the concentration of the larger players persists (who are, broadly, in strong shape now from both a capitalisation and a double-digit RoTE sustainability perspective) and the challenger bank experiment is largely perceived to have failed (witness the difficulties that Metro Bank has faced as a case in point). While it is possible, in philosophical terms, to imagine the rise of Revolut (or similar-type newcomers to the industry) having a substantial disruptive impact on the market, change is an elongated process in a banking sector context and I would not be unduly concerned on a medium-term view. However, one interesting player to keep an eye on in the UK is JPM - the technologically-sophisticated global behemoth is developing a digital bank, Chase UK (and is rolling out the concept in other populous Continental European regions too). This is a long-term play, but, given JPM’s considerable strategic vision and ambition, financial and intellectual resources, and technological capability, one suspects they’re not getting involved to become just a 5% market share player in UK mortgages (for example).

I will explore key current themes including margins (with the ever-competitive UK mortgage market and the keen competition for deposits springing to mind), asset quality (the prognosis is broadly positive in this vein), continuing capital returns and many more topics over the coming weeks and months. I also spent a lot of time in my analyst days focused on specialist lenders like Aldermore, Close Brothers, OSB Group, Paragon Banking Group, and Shawbrook (to name but a few) and I will distribute reflections on that pocket of the market (with most of these players faring far better than their mainstream challenger counterparts) in due course too. And I won’t forget the digital lenders either - with recent news coming to mind in the form of: i) Starling Bank formally seeking to appoint a Head of Investor Relations, unsurprisingly, fuelling speculation about a prospective near-term IPO; and ii) the awarding of a banking licence (with restrictions, i.e., AWR) to Revolut.

Irish Context: The Irish banks are undeniably in strong shape in my view. The competitive backdrop has evolved to favour the larger players - AIB and BOI most particularly (though, notably, the PTSB management team has successfully executed a substantial transformation programme) - and, while there are newcomers on the scene, it seems unlikely that they will make much of a dent in the pillar banks’ market share in lending and deposits on a medium-term view. In any event, given the exceptional strength of returns delivery in the case of the two main players (and despite onerous risk weights), truly wholesale change in a competitive context would be necessary to derail ‘the returns story’. Indeed, given capital and loan provisioning strength, it is difficult to identify any company-specific risks to be particularly nervous about. Excess provisions in retail loan books should be broadly sufficient to offset any further impairment in CRE loan assets. Additionally, while there is a sense among market participants that a material structural upward shift in deposit beta will eventually manifest (i.e., a ‘normalisation’ of the degree of passthrough of the changes in base rates to blended average customer deposit book pricing) owing to ‘lag effects’, one would be forgiven for arguing that depositor inertia is unlikely to evolve enormously from here over the coming years given: i) the muted reaction to much improved mainstream bank term deposit rates last year; ii) consistent very limited rotation into alternative deposit / investment product; and iii) the fact that we now appear to be in a downward rate cycle (if you haven’t moved by now…). However, with that said (and as management teams have noted), the current returns profile that the largest players are enjoying should not be considered sustainable in a medium to longer-term context - but the burning question now is ‘what does normal look like’ in an Irish banking market returns context.

I will explore key themes like competition, asset quality, the capital returns story, politics (note that it seems likely we will see FG & FF capture a sufficient share of the vote to form a coalition government again), the controversial pay caps (which are an obstacle to retention and talent acquisition in my view - and the resignation of the PTSB CFO last week surely nudges this topic up the political agenda for review post-General election), PTSB’s competitive disadvantage owing to its inordinately high risk weights, and many more topics over the coming weeks and months.

That’s enough for now but I’ll be back soon!

So, without further ado, I’ll wrap up now and circulate detailed perspectives on select developments / themes at some point next week, i.e., during the week commencing 2nd September. It’s a free newsletter so please don’t hesitate to subscribe and spread the word! All feedback welcome - and I hope you enjoy reading it!

Disclaimer

The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.

Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.

Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.