Is it a bank - or a tech firm?
With the disruptive impact of new technology now impossible to ignore, firms want to play up their tech credentials to show they are not being left behind.
A recent trend among financials keen to demonstrate their growth potential to investors has been to position themselves as tech companies, pointing to their growing numbers of software engineers or exciting innovations they plan to bring to market.
With the disruptive impact of new technology now impossible to ignore (from chatbots replacing customer service, to the use of blockchain for digital transactions) firms want to play up their tech credentials to show they are on the front foot and not being left behind.
The lines between the two sectors have indeed blurred over time, but the challenge for us as investors is to pick out those whose claims don’t stand up to scrutiny – and those showing real leadership.
EM companies at the forefront
Some of the clearest signs of genuine innovation are coming from emerging markets (EM).
Take Russia’s Sberbank for example. The banking group is building a digital ecosystem which takes in a whole range of industries, including e-commerce, telecoms and e-health. The projects which form part of its 2020 digital strategy include a cashless smart city, its own communication platform, and using visual and voice biometrics to detect fraud.
The company deliberately measures itself against some of the big global tech firms, for example its Net Promoter Score (the willingness of its customers to recommend a company’s products or services to others, a proxy for brand loyalty) is comparable to that of Google and Amazon.1
Meanwhile, another EM company taking a lead in tech is China’s Ping An, which is now one of the biggest integrated financial service platforms in China. The group’s internet users now exceed half a billion (more than a third of new customers come from users across its five ecosystems: finance, healthcare, smart city, real estate and auto).
Ping An has spent billions of dollars on R&D, with developments including an online-lending platform and a healthcare portal. There are plans to further invest around US$15 billion in the next 10 years.
The bottom line – long-term profitability
Of course, no financial company can truly align itself with tech firms until it is able to genuinely come close to the much higher profit levels generally seen by the latter.
With this in mind, Sberbank’s technology claims are perhaps more credible than its global competitors. Its return on equity is already greater than 20%, more than both its Russian and global competitors, and by its own calculations, this is greater than the average of the some of the world’s leading tech firms.2
Return on equity of Sberbank in Russia 2011-2017
Statista: Sberbank of Russia Annual Report 2017
So, if a financials company is projecting itself as being at the cutting edge of technology innovation, investors will at some point expect this to deliver something outside the usual return profile for a bank. In fact, the improved integration of tech is something of a necessary development, as failure to do so by financials companies could result in their profit pools being badly disrupted. In our view, to spot those which are going further than just relaying buzzwords and are genuinely integrating technology into their DNA requires the scrutiny of research-driven fundamental analysis as well as in-depth company engagement.
Past Performance is not an indicator of future returns
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1 Sberbank Investor Day Strategy 2020 NPS 2016
2 Sberbank Investor Day Strategy 2020. 9 months annualised ROE 2017