In the early days of the Covid-19 pandemic, the banking industry faced great challenges when the economy came to an abrupt stop. However, banks have weathered the pandemic well so far, and proven their value and contribution to the economy and society by ensuring ongoing funding to businesses and households. Unlike previous economic crises, banks’ profitability held up well. The largest lenders in the United States being JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, and Morgan Stanley, have all beaten earnings expectations in the latest quarter and expect continuing economic rebound from the pandemic, despite many challenges the world is still facing.

While large banks help keep financial markets moving and support large company debt, the thousands of community and regional banks are a crucial source of funding for families and small businesses in the U.S. Small businesses are key to the U.S. economy, representing the vast majority of all businesses, and employing almost half of the private sector workforce. As of the end of 2019, the U.S. had 4,750 community banks with more than 29,000 branches throughout the country. Together, they represent 15% of the banking industry’s total loans, but make 36% of all small business loans and 70% of all agricultural loans, according to the FDIC’s 2020 Community Banking Study.

Many big and profitable companies obtained loans from the Paycheck Protection Program (PPP), which was intended to help small businesses keep employees on their payroll. Yet, many small businesses were let down by large banks’ slow responses and complicated application processes. Community and regional banks, on the other hand, responded quickly and proactively. In the first round of the PPP, community banks processed 60% of the program’s funding. Even after the large banks began to participate in the second round, community banks still accounted for 45% of the funding. As a result, many community and regional banks have fortified their relationships with clients and gained new customers during the pandemic.

Wintrust Financial Corporation (WTFC US)

Wintrust Financial Corporation (a holding in our portfolios), has over 150 Wintrust Community Bank locations, primarily in the Chicago metropolitan area, southern Wisconsin, and northwest Indiana through its 15 community bank subsidiaries. The company was founded in 1991 by current CEO Edward J. Wehmer, with the goal to provide an alternative to big banks. Over the years, they stayed true to their mission. In 2020, less than a week after the launch of the PPP, Wintrust built a customer-facing loan inquiry system, and created a new underwriting process to meet businesses’ needs. In the first week, the company took in 7,700 inquiries for $3.1 billion worth of loans. By the end of June 2021, it funded over 19,400 PPP loans for $4.8 billion. Despite the global pandemic, Wintrust had their record growth in 2020, total assets increased by 23% compared to 2019, and total loans increased by 20%. The bank’s consistent and conservative approach to credit and liquidity helped the company remain resilient during the tough times, and the nonperforming loan ratio actually improved to 0.4% in 2020, from 0.44% in 2019.

UMB Financial Corporation (UMBF US)

We also own UMB Financial Corporation in our portfolios. Headquartered in Kansas City, Missouri, UMBF offers commercial, personal, and institutional banking. Regional banking accounts for 37% of its total deposits. Its loan mix is more diversified than peers, across commercial & industrial, commercial real estate, residential real estate, and others. In 2020, its total loans increased by 10.4%, much faster than peer median loan growth of 2%. During the pandemic, the company works actively with customers by offering payment deferrals and loan modifications. The company also recorded over 5,000 loans totaling $1.5 billion under the PPP. Nonperforming loan ratio remained low at 0.55%, below peer average of 0.79%. With over 50% of its loans being variable, UMBF is well positioned to benefit from the eventual rate hikes projected in 2022.  

A major trend accelerated by the pandemic is the adoption of digital banking. As a result, the industry has seen an accelerated number of bank branch closures. In the U.S., there were 2,284 net closures in 2020, up from 1,391 in 2019, leaving the total number of branches to 74,928. In the United Kingdom (UK), 368 branches were shut down in 2020. 736 bank branches have closed permanently so far in 2021, and another 220 are already planned for 2022. The situation is no different in Japan. Mitsubishi UFJ Financial Group, Inc. (MUFG), the country’s largest lender by assets, plans to close 40% of its domestic branches by 2023 to cut costs. With the declining number of branches, ATMs have become an even more important touch point with end users. To improve operational efficiency, banks are increasingly sharing their ATM infrastructure or outsourcing the ATM operations.

Seven Bank (8410 JP)

Seven Bank (a holding in our portfolios), an ATM bank, is a beneficiary of this trend. It has the largest ATM network in Japan, with over 25,000 ATMs installed across the country. It also has over 9,000 ATMs in the U.S., 1,400 ATMs in Indonesia and close to 700 in the Philippines. With respect to ATMs, people may simply think of cash deposits or withdraws as transactions, as commonly seen in North America. However, Seven Bank ATM is a lot more than that. The company is upgrading all of its ATMs to the fourth generation, which incorporates advancements in biometrics, artificial intelligence (AI), Internet of Things (IoT), and other technologies. The next-generation ATM is capable of face recognition for identity verification, settlement with QR codes, optimized operations through AI and IoT, and there is a 40% decrease in electricity usage and CO₂ emissions. Seven Bank is also partnering with banks and non-bank institutions to provide financial services, including topping up e-money cards, international money transfers, refund issuances, bill payments, advancing wages, and much more. For example, during the pandemic, many musical and sports events were cancelled, and customers were able to get a refund through Seven Bank’s ATMs; residents in Japan were also able to get Covid-19 cash handout from the government through these ATMs. With the digitalization of the economy, ATMs are not becoming obsolete, but proving to be indispensable.

As this will be our last weekly commentary of the year, we would like to thank you for your continued support, and wish you a joyful and prosperous 2022.

Happy Holidays!

The Global Alpha team

Recent headlines have been focused on the energy sector to lead the global transition to a low-carbon economy. However, one sector that hasn’t been getting the attention it deserves is the consumer discretionary space. Current consumer spending habits are responsible for about 60-70% of global emissions. Consumerism has been deeply rooted in the current culture, but perhaps it’s time for some change. During the most recent Paris Fashion Week, a climate activist walked out onto the runway holding a banner stating consumerism = extinction. Although this might be a bold statement and doesn’t necessarily represent consumer sentiment, shoppers are in fact looking for more responsible alternatives in their day-to-day purchases. Consumers will thus need to have access to more recycled and reused products to satisfy their desire to make a difference and contribute to the circular economy.

The fast-fashion industry has been growing at a rapid pace and is expected to increase by 63% in 2030, which would be the equivalent to producing 500 billion t-shirts.1 The excess production is largely due to shorter wearing cycles. On average, consumers are buying about 60% more goods and are wearing them for 50% less time. As a result, they are simply thrown away, and 85% ends up in landfills.2 The Global Fashion Agenda recently published a new report about scaling the circular economy and the need to reduce barriers to mass recycling programs, specifically for textiles. In order to achieve this, fashion manufacturers need to focus on the following factors: their materials need to be used more, made to be made again, and made from safe and recycled or renewable inputs.

“Used more” entails producing goods that have greater longevity. It has long been known that certain companies count on planned obsolescence to push consumers to purchase more and boost sales consistently. However, there are benefits to higher quality and lower production volumes. Inventory levels can be limited, thus requiring less storage capacity and less inventory is thrown away or destroyed, minimizing fees paid to landfills and incineration facilities.

“Made to be made again” is a class of products that are manufactured to be disassembled at the end of their life-cycle with the aim of being repurposed or reused. The packaging component of the product is also meant to be minimal to avoid additional waste generation. Alternatively, it may be produced from reusable materials.

“Made from safe and recycled or renewable inputs” involves production that uses these inputs efficiently by optimizing resource consumption, as well as limiting or avoiding hazardous waste. Hazardous waste is often discharged into the environment, causing harm to both humans and ecosystems. Limiting the use of virgin materials is a key component, because it often leads to the irreversible degradation of the world’s limited natural capital.

Global Alpha currently holds two companies who are leading the way by innovating in the circularity of the fashion industry.

Asics

Asics is a global sports and lifestyle brand that manufactures a wide range of products. Since its beginning, the company’s ethos has been, A Sound Mind in a Sound Body.To achieve this, the company is also focusing on a sound environment. Earlier this year, Asics launched their Earth Day Pack, a collection of shoes made from recycled plastics using a circular manufacturing process. Through this method, the company was able to use the equivalent of 25,000 t-shirts to produce the entire shoe collection. Today, 95% of their new running shoes already contain some recycled materials. By incorporating circular manufacturing processes, they are able to help reduce their own footprint, while reducing the amount of waste sent to landfills. In the company’s most recent materiality assessment, stakeholders identified circularity as one of their top concerns in which Asics will use this as a guiding target to improve and shift their strategy to a cleaner and more sustainable one. Their VISION 2030 roadmap will help them achieve these specific goals. Some of these ambitions include creating a circular business model, both internally and externally with suppliers, as well as increasing the percentage of recycled materials within each of their products.

Coats

As a leading industrial thread manufacturer, Coats has been an example of what a company in the textile industry should strive to achieve. Sustainability is a core part of their operations, and as a key input for more than 30,000 apparel and footwear manufactures around the world, they are able to make a positive impact in numerous supply chains. Plastics account for a large part of their footprint, and this is where they are looking to make the biggest difference. Currently, the company’s threads are manufactured using 95% virgin plastic, but by 2024, they are looking to completely switch to 100% recycled plastic inputs. Additionally, they want to switch their energy consumption throughout their global operations to largely come from renewable sources.

Due to the company’s dedication to sustainability, they have been attracting many new customers who are looking to improve the quality of their suppliers. The company’s EcoVerde line, which came out in 2018, offers 100% recycled alternatives to virgin polyester by reusing PET water bottles. Since the line’s inception, they have recycled 240 million plastic bottles and avoided about 5600 tonnes of CO₂ in the process.⁵ Now that’s impressive! In our February 4, 2021 commentary, Untangling the threads of sustainability in fashion, we further highlight Coats’ focus on sustainability in fashion.

ESG is an integral part of Global Alpha’s company assessment and we reward companies that show excellent practices and take initiative to advance their sustainability journey. We will continue to look for leaders paving the way in the consumer discretionary industry, fighting climate change, and contributing to a positive future.

Have a nice day.

The Global Alpha team