Ahead of the Curve | Friday, 10th December 2021

Omicron variant causes short-term market wobbles
While the Financial sector was predictably weak following the Omicron discovery, and uncertainty remains surrounding the potential ramifications of the new variant, we do take solace in the fact that 1) severity does not appear to be higher (and may well be lower) than prior variants, 2) early data suggests that vaccinations should be at least somewhat effective in minimizing risk of hospitalizations – particularly with boosters, 3) real lockdowns are extremely unpopular and likely only a last resort for most governments and 4) even with lockdowns, Oxford University and Eurostat data suggest the sensitivity of economic growth to lockdowns has dramatically lessened from 2020.  What is perhaps most notable to us is that despite the new uncertainty injected into markets from the variant, the Fed has doubled down on its newfound hawkishness, with Chair Powell and several other key leaders finally acknowledging that inflation is not simply a temporary issue.  This has flattened the curve, as we would expect, with longer term inflation expectations getting tamped down by a Fed that is more focused on battling inflation than previously thought. All this has left forward rate curves meaningfully higher than three months ago not just in the US but in Europe and even the UK as well (despite the BOE’s decision to hold off on a hike at its November meeting). As we have discussed in the past, this is a key driver for banks’ top lines and we see this as a powerful tailwind for continued earnings momentum.

UniCredit presents new business plan with a bang
UniCredit CEO Andrea Orcel presented the bank’s new business plan through 2024, with a credible path to achieving a 10% ROTE and returning 65% of the bank’s market cap to shareholders during this period.  The targeted profitability and level of capital returns were well over 50% higher than the market’s expectations, driving the shares up 10% on the day.  The cornerstone of the business plan is 6% higher revenues driven by fees, a 5% decrease in the cost base net of expected IT investments, and a reallocation of capital away from underperforming lines of business.  We had been expecting an ambitious business plan of this nature based on Orcel’s prior turnaround of UBS’ investment bank – and believe his success at UBS speaks to the credibility of this plan being achieved.  Even after the strong market reaction, the stock still trades at only 0.55x price/tangible book – we see close to 100% upside from these levels as Orcel executes the plan and recurring 13%+ shareholder yields (including dividends and buybacks) become a reality.

Citizens Financial CEO speaks at US financials conference
Citizens Financial CEO Bruce Van Saun spoke at a marquee US financials conference, highlighting several key drivers for the bank. The company is in the process of closing three acquisitions – JMP Securities, Investors Bancorp, and HSBC’s NYC branches – driving idiosyncratic earnings accretion.  The outlook for loan growth remains strong, with commercial line utilization of 31% across the portfolio versus 38% historically, highlighting the growth capacity as business activity continues to recover.  In addition, Citizens offers an above-average exposure to rising interest rates with a 100bps shift in the curve driving a 19% increase in EPS versus a median of 13% for large U.S. banks.  Lastly, while most U.S. banks with rate sensitivity currently trade at a premium, Citizens continues to trade at a discount to peers at 10x 2023 earnings – we see at least 20% near-term upside just to trade more in-line with its rate sensitive peers, which could be catalyzed as the Fed continues its hawkish shift.