November 30, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Capital Group’s European bank sell-off was driven by single fund manager

A single portfolio manager at Capital Group drove a €7bn sell-off of European bank stocks this year, after the war in Ukraine and the threat of a global recession caused the investment giant to sour on the sector.

Capital, one of the world’s biggest fund managers with $2.7tn of assets, until recently had been one of the few active investors backing European bank stocks, which had become pariahs after a decade of depressed profitability, misconduct scandals and market share losses as they restructured after the financial crisis.

Over the past few years, led by respected portfolio manager Nick Grace, Capital had built up large, often top-five, stakes in lenders including Barclays, Deutsche Bank, Commerzbank, Société Générale, UniCredit, Santander, BNP Paribas and UBS.

But fears over rising inflation and falling growth sparked by Russia’s invasion of Ukraine pushed Grace and some of his fellow Capital managers to sell €7bn of those banks’ shares since the start of the year, according to people familiar with the matter and FT calculations.

Capital Group’s €7bn Euro bank sell-off

Between January and March 2022

Capital held 2.7 per cent of Spain’s Santander at the end of last year, but has since sold €400mn of shares and is down to 2 per cent as of March.

March 2022

Capital sold £900mn of Barclays stock — equivalent to a 3.6 per cent stake — contributing to a 10 per cent dip in the shares in the following two weeks.

April 2022

Capital funds dumped their 5 per cent holdings of Germany’s Deutsche Bank and Commerzbank, worth €1.27bn and €475mn, respectively. Their share prices fell 11 per cent and 10 per cent, respectively when it was disclosed, wiping €3bn from their combined market caps. Commerzbank’s shares have since recovered, while Deutsche’s are down 20 per cent since the disclosure.

US private equity group Cerberus started to unwind its ill-fated five-year bets on Deutsche and Commerzbank around the same time.

May 2022

Capital sold €1.1bn of its holding in Dutch bank ING in two transactions

Capital was UniCredit’s largest shareholder, but this month cut its 6.8 per cent stake to below 4 per cent.

Capital was also SocGen’s largest shareholder, until it reduced its stake from 7.8 per cent to 4.8 per cent in May.

Grace — a London-based New Zealander who has worked for Capital for 32 years, co-managing its $160bn EuroPacific Growth fund — accepted losses to shield Capital Group from what he believed would be deeper damage.

Since February 11, the European Stoxx and FTSE bank benchmark indices have fallen 20 per cent and 14 per cent, respectively.

This has rekindled belief among some investors that European banks are inherently undervalued.

“Santander, Standard Chartered, Barclays and UniCredit are trading on a price-to-earnings ratio of five times,” said Davide Serra, chief executive of Algebris, a boutique asset manager. “This has never happened in 50 years . . . albeit war and inflation pose a clear risk.”

Capital’s contrarian conviction bet on bank stocks, then its swift exit, shine a light on the inner workings of one of the most influential, and most secretive, investors in the world.

Among active investors, Capital has an unusual structure for its managed funds. Each has multiple portfolio managers who receive a portion of the money to manage as they see fit. They are encouraged to take strong bets within their area of expertise.

Grace bet that European lenders were undervalued and traded at an unfairly steep discount to the book value of their assets. He thought they had improved capital levels, smaller and less risky balance sheets and were poised to generate billions more in profits as interest rates rose, improving loan margins.

Additionally, investment banks such as Deutsche and Barclays had posted record earnings off the back of a historic M&A and IPO boom, as well as surging trading volumes in volatile markets during the coronavirus pandemic. 

Grace and other managers had also hoped that a long-awaited consolidation would generate value through cross-border and domestic mergers. 

While Grace’s reputation and track record internally had led many Capital managers to invest alongside him, others had not backed bank stocks for years, another person familiar with the funds’ investments said. 

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Grace had earned good returns as the global economy recovered from the initial shock of Covid-19 and central banks started to raise rates meaningfully for the first time in a decade.

From May 2020 until February 11 this year, the Stoxx European banking index rose 95 per cent and the UK FTSE 350 bank index 57 per cent.

But as Grace sold after the invasion began, many of his fellow portfolio managers with similar positions followed suit. They also cut their industrial and chemical company holdings while retaining a large position in the oil and gas sectors, the people added.

Capital declined to comment for this article.

Additional reporting by Harriet Agnew

This article has been amended to reflect the fact that Capital did not sell its entire stake in ING