Carraighill: How Data Helps Us Generate Insight Into Financial Services Firm Earnings

At Carraighill, all analysts undertake deep fundamental analysis across multiple companies in the financial services space.  This involves producing detailed financial models on potentially 100+ companies in the Banking, REIT, Asset Management, Housebuilder, and Payment industries in core Europe, the UK, EEM, Turkey, and more recently Mexico. To achieve this, we need a framework to help us understand the earnings drivers across each sector. This allows us to cross-verify company management comments on trading to the underlying data, press articles and other industry expert views.

This involves the distillation of 4bn+ data points into the 10-20m points that we believe are relevant for these companies. Our framework allows us to understand how they interact with each other, and we produce many monthly data insight reports across each of these sectors. The above illustration is a simplified version of our thought process.

Although it may appear complex, in reality, it is very simple. Starting at the Star*, one can logically follow the trail (moving downwards in the diagram):

Point 1: Households are employed by both Private Companies and the Government: The income in a country is the aggregate of wages in each home, which is determined by the quality of businesses and their ability to compete both globally and domestically. If a firm’s top-line is rising, then wages are also likely to increase, and job creation is likely to be vibrant (Sweden and Italy are at opposite ends of this spectrum). A rising trend is generally a positive environment for banks and Housebuilders. For example, it should lead to increased demand for mortgages (these assets often represent close to 50% of total private credit in any given economy).

Point 2: The decision matrix around whether these employees work from home influences the Office REITs. This is becoming a very complex issue for companies that operate in this space.

Point 3: Following the diagram down, we note that if the employment and wage outlook is positive, this may encourage consumers to take on additional leverage. This is also important for banks, who generally have a higher profit margin from credit card, motor finance, and other shorter-term lending.

Point 4: A positive household income trend and higher levels of borrowing also increases the likelihood of rising consumption. The faster income rises, the more people will either spend or save. If people consume more, this is a very positive backdrop for payment companies. Within this, understanding the nature and evolution of consumption is an imperative as not all consumption helps payments: For example, we need to ask: What portion of spending in an economy is discretionary (which is more likely to be financed by credit cards)? What share is executed online? How is this structurally evolving over time?

In general, the greater the proportion executed online, the higher the potential revenue for payment companies like Adyen, Worldline, Nexi, PagSeguro, and Stone.

Point 5: The corollary of a high level of spend online is that consumption in-store and in shopping centres is lower. The evolution of this is important for Retail REITs such as Unibail and Klépierre.

Point 6: The difference between income and consumption is savings. This money can be put on deposit with banks or can be used to buy asset management products. The countries with high levels of household free cash flow in Europe include France, Germany, Italy, and Sweden. These economies also have large incumbent asset management firms (Amundi, DWS, and EQT are some examples). The higher the differential and the lower the loans to deposits ratio in any given country, the more “flow” that a given asset management firm can target.

Finally, these savings are often placed in the equity and debt of domestic companies that allow them to invest and generate increased profits, leading to more employment and consumption in time. This is especially the case if a country has a structural competitive advantage.

This circle continues as a structural advantage leads us back to the * in this diagram.

At Carraighill, we have the product tools and the data distilled sufficiently to focus increasingly on the company-specific factors that will now drive investment returns. This includes allocating greater time going forward to detailed fundamental analysis.

Ultimately, our role is to understand the long-term structural trends and the companies best placed in these cross sectors to benefit. This is a consistent process that relies on hard work, humility, and, most of all, patience.