Investors in European bank stocks have reason to be nervous. The spread of negative interest rates in Europe and concerns about capital adequacy at some major lenders have caused banks’ shares to drop sharply in recent weeks. Credit Suisse and Deutsche Bank have seen their shares break below the levels reached at the depths of the 2008–’09 financial crisis.
The good news, according to analysts and portfolio managers, is that the risk of a banking collapse à la 2008 appears far-fetched. The bad news, they add, is that banks aren’t necessarily a buying opportunity at these levels, given the industry’s earnings outlook.
“If you look at the sector as a whole, there’s very little cause for concern about a solvency crisis,” says Wouter Sturkenboom, senior investment strategist at Russell Investments, the $237 billion asset manager, in London. “The system is a lot better capitalized, and better able to deal with shocks, than in 2008.” He also believes that the European Central Bank has done a good supervisory job of going through banks’ books to identify potential bad-loan surprises. “We think there are genuine concerns, and investors are right to price these in,” he says. “But they seem to be overdoing it, by pricing in something close to a systemic risk that we don’t see.”
The Euro Stoxx Banks index, which tracks the share prices of 30 of the region’s leading institutions, plunged by just over 30 percent in the first six weeks of this year before rebounding by 10 percent in the past week.
David Moss, head of European equities at BMO Global Asset Management in London, which also manages $237 billion, agrees that systemic risk is low. “European banks have raised €800 billion [$888 billion] of new capital since 2008, not including retained profits,” he says. In addition, he notes that the ECB and other central banks in Europe “have made clear that they are there to provide whatever liquidity is required.”
In principle, this has created buying opportunities. “The sell-off looks overdone, judged by both valuation and sentiment,” says Sturkenboom. He notes price-to-book values as low as 0.5 for some banks, and technical indicators, such as relative strength indexes, that suggest some banks are oversold.
Low prices have indeed prompted some asset managers to purchase bank stocks in recent months. “We have selectively added in some ways and places,” says Moss. “There are lots of opportunities in better-quality banking institutions.” He cites a recent investment in ING Group, the Dutch bank, because of its strong outlook for dividends and, as he puts it, “very clear disclosures in various parts of the book.” The fear that something nasty is lurking in the loan portfolio is much lower than in 2008, he adds, in part because of the ECB’s asset quality reviews and stress tests in the past two years.
Colin McLean, CEO of SVM Asset Management, an Edinburgh-based stock-picking boutique with £500 million ($714 million) in assets, says the price of Italy’s Intesa Sanpaolo has fallen to “close to the point at which I might buy,” and adds that a number of other Italian banks are also potentially attractive at current prices. He points to improving credit quality metrics, with Intesa reporting a 28 percent drop in provisions for nonperforming loans last year and total provisions, including collateral, of 139 percent of NPLs. Intesa’s shares were at €2.49 on February 17, down 12 percent on the year and 32 percent below its 52-week high.
Although some managers are tempted by current valuations, few seem inclined to ramp up exposure.
“There isn’t a funding crisis, but there is an earnings crisis — though perhaps the word ‘crisis’ is a little exaggerated,” says Paul Vrouwes, who manages $4.4 billion of global financial stocks at NN Investment Partners in the Hague and is underweight banks in Europe and globally. One reason is downward pressure on interest margins, he notes. Short-term rates on government bonds held by banks and on money deposited by banks with the ECB have fallen deeper into negative territory. By contrast, banks can’t quickly lower the rates they pay on long-term deposits, and they certainly can’t reduce them below zero. Vrouwes also cites downward pressure on fees and the increased risk of bad corporate loans made to troubled commodity companies.
Many asset managers are keen to avoid European banks that rely heavily on investment banking. Vrouwes notes that European investment banks have lost ground to their larger U.S. rivals. BMO’s Moss bemoans the volatility of investment banking earnings, at Deutsche and other institutions. McLean of SVM also has major reservations. “There is a point at which I might buy Barclays,” he says, noting that the U.K. bank’s stock price has dropped by 35 percent over the past year, to 167.9 pence (239.2 cents). But, he adds, “I would want to see it cut its investment banking more radically first.”
For some investors, the skepticism toward European banks is nothing new. Comgest, the €21 billion Paris-based investment manager, hasn’t invested in European banks since the firm was founded in 1985.
“Returns can be spectacular when things go right, but are extremely bad when things go wrong,” says Franz Weis, Comgest’s fund manager for European equities. He continues to monitor the sector and meet with bank managements but says he cannot find any banks that meet his firm’s criteria of consistent double-digit earnings growth, based on high barriers to entry and other long-term structural advantages.
