Chris Foster

Banking on returns

Chris Foster

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:, 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.


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Thursday, November 30, 2017, 12:47 PM