Article03 Oct 2025

Financials remain resilient through policy and AI shifts - September Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Market and Trust review

Global markets remained strong in September with market sentiment supported by resilient corporate earnings, expectations for continued interest rate cuts by the Federal Reserve and the support to growth from AI-related capital expenditure. This has enabled investors to look through a complex investing landscape which has included lingering concerns on the US labour market, ongoing tariff negotiations and the prospect of a government shutdown.

MSCI ACWI Financials rose 1.4% during the month led by European financials with the region’s banking sector continuing its outperformance on the back of earnings upgrades. The Fund’s NAV rose 1.0% with the relative performance impacted by the underweight in Canada and Japan along with sharp moves in US online trading stocks such as Robinhood Markets.

Conference season

European banks gave a positive message during the conference season, noting tailwinds from a steeper yield curve, signs of loan demand picking up (particularly in southern, central and eastern Europe) alongside a stable asset quality environment. Managements reiterated capital return plans implying total yields (including buybacks) of 8-9% over the next two years along with an increased appetite to deploy surplus capital for acquisitions.

While political risk has become more evident in recent months with references to bank taxes and government intervention in M&A, underlying trends for European banks remain healthy and reflective of a more normalised interest rate environment. Despite material outperformance in recent years, valuations remain undemanding at 9x 2026 EPS and 1.1x 2026 book value per share with relative P/E valuations (to both broader European markets and global financials) remaining well below historic averages. The Trust remains overweight European banks, an area we have added to in recent months.

The impact of artificial intelligence on financial services continues to grow in importance, particularly following the launch of new AI services, such as Anthropic’s Claude for Financial Services released in July, which has highlighted AI’s transformative capabilities. Consequently, the debate on AI has rapidly evolved from focusing on future efficiency savings – often referenced in vague guidance in outer years – to more immediate impacts on companies’ competitive positioning, pricing power and total addressable markets given potential new distribution possibilities.

The impact of artificial intelligence on financial services continues to grow in importance

The companies perceived as most at risk from AI have experienced a material derating in recent weeks and have included data providers, exchanges, rating agencies and risk analytics businesses. A key determinant in assessing vulnerability is the extent to which the data is proprietary, how integrated a company is into client workflows and whether the client requires real-time and highly accurate data. The Trust has very limited exposure to incumbent businesses in these subsectors but we now consider the scale of the derating has opened up potential investment opportunities in companies where we are confident they can capitalise on the structural growth in demand for data which AI is set to accelerate. The Trust has recently built a position in London Stock Exchange Group.

UK financials have materially outperformed in 2025 led by strong returns from the banking sector on the back of robust operating trends and a low valuation starting point. However, speculation on taxation ahead of November’s budget has weighed on sentiment recently with reports that the government is considering additional bank taxes – a 3% bank tax surcharge and a 10bps bank levy on UK balance sheets is already applied. In particular, a recommendation by the IPPR to utilise reserve tiering, raising additional bank taxes by £3.6-10bn annually, led to pressure on UK bank stocks. We think it is unlikely that the government would increase bank taxes by such a large amount – Bank of England Governor Andrew Bailey has spoken against reserve tiering – but expect such speculation to remain an overhang until the budget in November.

UK bank managements noted that market sentiment on UK fiscal health is at odds with current operating trends with no sign of issues on asset quality while they welcomed a slight shift in tone from the regulator which now has growth and competitiveness as an objective. In light of the policy uncertainty in the UK, we have reduced our UK banking exposure and offset it with additions in mainland Europe.

Outlook

While there is ongoing political noise related to both trade negotiations and budget discussions, we have been encouraged by recent management feedback on operating trends which points to continued confidence on delivery. A backdrop of more normalised interest rates, steeper yield curves – in part a reflection of large public deficits and populist policies – and an easing in regulation as governments shift to a more pro-growth stance provides a supportive backdrop for the sector.

While this shift in environment has supported the sector’s relative performance – it has outperformed over one, three and five years – valuations remain attractive, particularly in relation to the broader market.

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Nick Brind
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from Aberdeen where he was a Senior Investment Director in the Developed Markets team and managed the Aberdeen Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.