On the one hand, pure technology and fintech-oriented stocks have been weak so far year-to-date… So far this year, and especially over the past month or so, it’s been interesting to note the sluggish performance of the tech sector generally and then also stocks that aren’t quite “pure tech” but are probably better characterized as “tech-affiliated”. As it relates to our world in the financial sphere, “tech-affiliated” is more commonly referred to as fintech, which encompasses a wide range of companies that are increasingly forcing a convergence of traditional banking and technology, a dynamic that is only likely to accelerate in the coming years.
Indeed, we note that proxies for the NASDAQ (ticker QQQ) and fintech (ticker FINX) are as of this writing down ~3.5% and ~6.5% since the start of the year. This compares to an increase of ~16.0% for the XLF (the largest financials ETF). The purpose of this article is not to speculate on the specific reasons for tech-related weakness vis-à-vis financials, as that is outside our professional purview, beyond simply noting a couple of simplistic observations:
- The valuation disparity between financials and technology stocks relative to the broader market (which heading into this year was just about at its most extreme in over two decades).
- The interest rate backdrop, with significantly higher interest rates since the start of the year crimping growth-oriented stocks and providing a substantial tailwind to value stocks (and banks in particular, given the steepening yield curve).
…while bank stocks deemed to be “technology-forward” seem to be benefiting. Interestingly, while fintech-oriented stocks were weaker year-to-date, given the direct association and correlation with the tech sector, performance of bank stocks that we consider “technology-forward” and at the forefront of the convergence between banking and technology, was notably among the strongest in the bank sector through the first few months of the year. This observation is more anecdotal, as there is no index that we know of that tracks the aggregate performance of banks considered to be “tech-forward” (though on that note, stayed tuned for Travillian research content in the coming weeks) and, obviously, the characterization of a bank as “tech forward” is very subjective.
Several of these banks also reported to us anecdotally that one-on-one meeting requests at recent industry investor conferences have included many technology-focused investors that these banks had not previously met and that seemed to express sincere interest in their stock. In some cases, these meeting requests have outnumbered the bank-focused investor meetings.
This would seem to suggest to us that perhaps investment flows out of “pure” technology and fintech-related stocks may be finding a home in the best of breed of “tech-forward” bank stocks. In other words, amidst ongoing weakness in their sector of focus, these investors could simply be further stretching the definition of fintech to now include banks that are increasingly entering that realm and that allow these investors to stay within their mandate.
There are bigger-picture implications to consider here as well. Of course, tracking investment flows out of one sector and into specific stocks in another is impossible to track and verify with any precision, especially in real time. But it’s nevertheless an intriguing possibility in our view and one that merits monitoring, even if only anecdotally. For bank investors, it is certainly worth noting that tech-forward bank stocks – if indeed there is something to this speculation – might seem stretched at this point from a valuation standpoint but could prove more resilient in holding and even possibly building upon recent gains.
From a bigger picture perspective though, we continue to believe that the convergence of traditional banking and technology/fintech is likely to reflect a merging of the best of breed of these two worlds, rather than an outright takeover of one over the other. Both sides bring something meaningful to the table – technology/fintech primarily in the form of improved service, convenience, enhanced productivity, greater efficiency, and growth; traditional banking in terms of the value of the regulated banking system (safety and soundness), underwriting expertise (which isn’t always valued appropriately in boom times, but is invaluable in times of stress), and a stable source of sticky, low-cost funding.
The Travillian Group’s Banks and Credit Unions practice provides Search and Talent Advisory (TTG|Align) services to depository institutions across the country. Established in 1998, the firm has built a unique platform that touches every corner of the industry.
Our search and advisory professionals focus on building long-term, trust-based relationships with Boards, Executives and HR professionals. They assist our clients in the hiring of high quality, hard to find talent and provide full-life cycle consulting in such areas as succession management, leadership development, employee engagement, recruitment strategies and compensation.