Neil Brown describes how banks can drive shareholder returns by being a powerful force for good for their customers.
We are often asked about our significant holdings in banks as many people feel that their historic failings put them at odds with our focus on high-quality businesses delivering sustainable growth. We look to the future and believe that when banks do get it right they can deliver strong returns for shareholders by being a powerful force for good for their customers.
To analyse banks, we look at what we believe will be the core drivers of value over the long term and identify the banks that are excelling on those measures.
We favour the retail banks and search within them for cultures of driving growth in revenues and expansions of margin through the positive treatment of employees and customers. We look for a focus on customer outcomes over the long term rather than short-term sales volumes. We also look for employee training and development that has treating customers fairly at its core. In the long run, we believe a strong employee culture is critical to delivering customer focused behaviours, which is critical to delivering consistent financial outperformance.
Management is another key issue for us and we look for banks with a clear strategy to align the interests of management with those of customers and shareholders. A bank's reputation can be integral to driving top-line growth and deposits, while being ahead of regulatory requirements should be rewarding over the longer term.
In the US, an excellent example of a bank that understands its customers and offers products in a prudent and responsible manner is San Francisco-based First Republic.
First Republic has focused its business on the idea of great customer service. While most banks claim to do this, customers do not always agree. In the US, for example, the average net promoter score for the banking industry is 34%, which means only one in three customers would recommend them.
First Republic has an 82% net promotor score (source: www.firstrepublic.com, 30.09.17), above even the likes of Amazon and Apple. This has been a key factor in the bank's ability to grow at around four times the banking industry average over the past 15 years, while realising 500% lower loan losses over the same period.
In Europe, DNB is an example of a bank we have long rated highly. It has a strong focus on investing in the real economy with a large and growing exposure to retail banking and lending to small and medium sized enterprises. It is a high-quality bank that has consistently delivered returns on equity above its cost of capital. Against the backdrop of a relatively strict Norwegian regulator, DNB is also one of the least levered banks in Europe, at under 14 times versus peers at 25 times or more.
History has taught us that banks which have the potential to deliver strong returns without excess leverage are likely to outperform through the economic cycle and, given our investment horizon of three to five years, this suits us perfectly.
Its customer focus is further evident in innovative peer-to-peer payments app Vipps. This does a simple job by allowing people who own the app to pay each other without using sort codes and account numbers and already serves around 75% of the country's population.
At its core, banking can and should be a profitable business that can drive shareholder returns by doing right by its customers.
- To learn more about sustainable investment and Liontrust's offering: http://www.liontrust.co.uk/sustainable
- Investing for tomorrow, today: http://www.liontrust.co.uk/what-we-think/blogs/investing-for-tomorrow-today
- The investment case for "doing good" http://www.liontrust.co.uk/what-we-think/blogs/the-investment-case-for-doing-good
- Road to prosperity http://www.liontrust.co.uk/what-we-think/blogs/road-to-prosperity
- The investment opportunity in ‘Fossil Fuel Free' http://www.liontrust.co.uk/what-we-think/blogs/the-investment-opportunity-in-fossil-fuel-free
Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business.
• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. • The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund's share price. • Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. • If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. • There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.
• The information and opinions provided should not be construed as advice for investment in any