U.S. BANKS AND THRIFTS

Excellent “value” opportunities exist among U.S. banks and thrifts, as they typically have low downside risk and strong appreciation potential.

The U.S. Banks and Thrifts portfolio is comprised of previously converted thrifts as well as deposit accounts in mutual banks, which give Polaris valuable preferential rights to purchase stock if the mutual institution converts to stock ownership. The bank stocks in the portfolio, typically smaller thrifts and community banks, are broadly diversified geographically. Many of the portfolio holdings have footholds in multiple markets and neighboring states.

While our global portfolios typically incorporate select U.S. banks, the Thrifts portfolio is a dedicated investment strategy focused solely on the financial sector. Accredited and qualified investors interested in this portfolio should contact us directly for a more in-depth strategy discussion, whereby an outline of process, philosophy, holdings and performance can be adequately addressed.

In the meantime, we provide a brief glimpse into our current investment thesis and outlook for the portfolio, cognizant of ever changing macroeconomic conditions (geopolitical risks, interest rates/Fed Funds rates, capital requirements, etc.). Check back regularly to see our outlook for each coming quarter.

OUTLOOK FOR U.S. BANKS AND THRIFTS AS OF 12/30/23

Higher interest rates influenced markets in 2023. Market volatility in the fourth quarter was a function of inflation changes; expectations in 2024 will remain focused on the same. We expect the Fed and other central banks will keep rates at more stabilized levels especially in real, after-inflation terms, departing from the ill-advised period of artificially low or negative real rates. Target real interest rates may hover at levels around 0.5% for short-term maturities to upwards of 2.0% for 20- and 30-year bonds. If inflation moderates, nominal rate should follow. However, there are risks to decelerating inflation, namely wage inflation and shipping interruptions in the supply chain.

What does this mean for the banking market? Falling rates may alleviate the cost structure of deposits. High-cost deposits can reprice quickly at lower rates and the banks can hold onto the longer-dated high-cost loans (assuming no prepayments). It will be important for community banks to have a strong deposit mix in 2024. Lending metrics may look more appealing on lower mortgage rates; yet a slowing economy may discourage home buyers and reduce loan growth. M&A activity may start to heat up again. There are a lot of competing macroeconomic trends at play. We will be carefully assessing banks/thrifts, looking at net interest margins, credit quality, commercial real estate exposure and any number of other benchmarks.