Opportunities in the Aftermath of the Bank Crisis: Non-bank Financials

We see two main opportunities in the aftermath of the Bank Crisis of March 2023: 1) non-bank financials and 2) select regional banks.

The best near-term opportunity is non-bank financials. The whole financial sector was down 10% in March. For comparison, regional banks were down 29%. Several of our favorite non-bank financials were down more than 15% despite having little in common with regional banks. These non-bank financials don’t have bank deposits and are not facing increased regulatory scrutiny.

We believe that non-bank financials declined in sympathy alongside the regional banks because some market participants were using Financials sector exchange-traded funds (“ETFs”) to hedge or short the sector. The ETF selling put pressure on all of the stocks held by the ETF whether they were regional banks or not. Also, we believe some market participants who were large holders of regional banks had to trim their overall equity exposure and reduced their positions across all Financials as a result, including non-bank financials.

We like Virtus Investment Partners and OneMain Financial. Virtus is an investment manager trading at 6x earnings with zero net debt. The company has been using their cash flow to make acquisitions of smaller investment managers and to repurchase their own stock. Virtus was down 16% in March despite their assets under management increasing in both March and in Q1. OneMain Financial is a sub-prime lender and is not a bank. The company funds its balance sheet in the capital markets and is fully-funded with mostly fixed-rate liabilities. The stock was down 15% in March and trades at 6x earnings.

We would have included Genworth Financial and Sallie Mae in this group, but as of the writing of this letter, they have fully recovered.

We think the opportunity in non-bank financials is a temporary one. This opportunity is disappearing as non-bank financials get bid to higher prices. We think this opportunity will be largely gone by the time earnings season is over as investors realize the underlying strength of these businesses.