Article11 Mar 2025

European banks surge as M&A momentum builds - February Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Market review

European financials led the sector higher in February as they rose 6.7% on the back of strong results and better economic data. The region continued to benefit from being seen as the major beneficiary of any easing in the Russia/Ukraine war, notwithstanding the impact of the spat between Presidents Zelensky and Trump in the White House. Conversely, US financials were lower over the month with economic data softer and sentiment impacted by the uncertainty around any effect of proposed tariffs by the US on major trading partners and their likely response. Asian financials fell slightly despite China bucking the trend and seeing modest gains. Against that background, the Trust’s net asset value rose 0.9% outperforming the benchmark, the MSCI All Country World Financials Index, which rose 0.4%.

European banks and Italian bank M&A

AIB Group, Ireland’s largest bank, and UniCredit, Italy’s second largest bank, were the biggest relative contributors to performance over the month as European bank shares were the driver of the very strong performance of European financials. Results continued to show that the sector has been much more resilient to interest rate cuts while the anaemic growth in the likes of France and Germany has not led to banks needing to raise provisions for potential loan losses. Consequently, the sector has continued to see further positive earnings revisions. Unsurprisingly, capital remains strong which, coupled with very positive profitability metrics, underpins our view that the capital return story via share buybacks and dividends is well underpinned.

Chuck Prince, the former CEO and Chairman of Citigroup, gained infamy for his 2007 quote in an interview that, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Albeit against a background very different to that witnessed in the years preceding the global financial crisis and backed up by very strong balance sheets, Italian banking executives have been frantically looking for dance partners to join the party.

Capital remains strong which, coupled with very positive profitability metrics, underpins our view that the capital return story via share buybacks and dividends is well underpinned.Consequently, BPER Banca*, Italy’s fourth largest bank, with significant market share in the Emilia-Romagna region and total assets of €141bn, is the latest to join the M&A fray. In February, it announced an all-share offer for Banca Popolare di Sondrio*, the Lombardy-based lender with total assets of €57bn. This deal follows a flurry of recent activity in Italy, with Monte dei Paschi di Siena’s* all-share offer for Mediobanca* and UniCredit’s offer for Banco BPM*. With UniCredit also announcing that it had taken a stake in Generali*, we believe we are still in the early stages of a large wave of consolidation in the Italian financial sector.

US alternative asset managers

Our holdings in US alternative asset managers, Ares Management and Blackstone, were a drag on performance during the month as they suffered a sharp fall in their share price as the combination of very full valuations and an expectation that the flywheel of M&A activity, and therefore higher realisations (the conversion of assets into cash) were being pushed back given the uncertainty in markets, would pressure earnings. We significantly reduced our exposure to the sector at the end of 2024, selling our holding in KKR while reducing our holding in Blackstone. Nevertheless, we continue to like the sector as we believe it has compelling structural tailwinds, but felt there was a risk of a pullback in share prices in the short term and there would be a better opportunity to increase exposure.

Ares Management, which is predominantly a private credit asset manager so does not benefit from the tailwind of higher equity markets that a traditional asset manager benefits from, grew assets under management by 15.7% in 2024, highlighting the strength of those tailwinds. However, in the short term other factors come into play. CEO Michael Arougheti, highlighted the key one on the company’s earnings call: “We believe that there is a meaningful amount of pent-up demand to transact, driven by the need for private equity exits. As an illustration, there's over $3trn of unrealised value across 28,000 global unsold companies in global buyout portfolios and more than 40% of these investments are four years or older". As and when this is unlocked, it will be a big boost for not only alternative asset managers but investment banking activity to which we are also exposed.

Fidelity National Information Services

Fidelity National Information Services (FIS) was the biggest drag on absolute performance during the month. FIS is one of the largest providers of critical banking software to banks globally and fell sharply on disappointing earnings reflecting a delay in a number of key contracts starting testing, weaker cashflow and the reversal of a termination fee due to the failed takeover of a client, a positive as the client will now not be lost. We had a call with management on a US public holiday which highlighted their willingness to reach out to shareholders and repair the damage. With very little impact on earnings expectations, we have for now decided that it was a confluence of factors outside the control of management and the share price fall was an overreaction so have retained a holding.

Enhanced dividend

The Trust’s results were announced in February and in them the Board proposed the adoption of an “enhanced dividend” policy under which it will aim to pay, in the absence of unforeseen circumstances, a regular dividend equivalent to approximately 4% of its net asset value in a given year, with dividends paid quarterly as opposed to the current policy of semi-annually. Dividends will be paid from available revenue and topped up, if necessary, from distributable capital reserves. This compares to the dividend yield on the Trust’s ordinary share, over the past year, of 2.3%.

The proposal is subject to shareholder approval at the forthcoming Annual General Meeting in April, further details of which can be found in the Annual Report available on the Trust’s website. While the underlying dividend yield of the sector is around 2.8%, if share buybacks of the underlying companies in the sector were taken into account the total yield being returned to shareholders would be well in excess of the 4% proposed. Furthermore, we see this as increasing the flexibility of managing the portfolio to maximise total return.

* not held

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Nick Brind
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Financial Opportunities Fund, and the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from abrdn where he was a Senior Investment Director in the Developed Markets team and managed the abrdn Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.