While some European managers – including Argonaut’s Barry Norris and Henderson’s John Bennett – have been backing banks in the region for more than a year, others are now starting to eye the sector.
Banking stocks have responded well to the measures kick-started in January by European Central Bank (ECB) president Mario Draghi, but the sector still lags the broader index.
The MSCI AC Europe index has risen 12.6 per cent in euro terms in the past year, a full percentage point more than the MSCI Europe Banks index, data from FE Analytics shows.
The figures across five years are even more stark, with the index rising 63.3 per cent while the banks only gained 24.3 per cent.
Tom Becket, chief investment officer at Psigma Investment Management, said: “Next up we feel is a rerating of domestic-facing companies, including certain banks whose fortunes have been materially improved by the ECB’s financial chicanery.”
Mr Becket said “a small allocation to Italian banks is an interesting trade” at present, because of debt being cheap to raise and an improving economic outlook for that country and the continent as a whole.
He said Italian banks were also set to benefit from a recent shift in regulation confirmed earlier this year, which will get rid of an outdated, one shareholder/one vote governance system. This allowed local banking unions to control strategy and block mergers, critics have said.
The system is now expected to lead the way to consolidation in Italy’s banking sector. “The new power of the future [regulation and administration] could ensure a surge in mergers and acquisitions,” Mr Becket said.
Stephen Macklow-Smith, manager of the £121.6m JPMorgan European investment trust, agreed the changes in Italy could be positive for banks. He already has an overweight to financials in his portfolio and is keen on Spanish and Italian banks.
“I’ve been interested in these banks for the past 12-18 months and I think some got overlooked in the run-up to the [European banking] stress tests,” he said.
Spain is a few steps ahead of Italy and has already seen some consolidation within its banking industry as a result of regulatory changes.
In 2012, Spanish banks were forced to raise an extra €30bn (£21.5bn) in new provisions against their real estate exposure. The banks that could not afford to make these provisions were subsequently forced to take up high-interest loans from the government to do so.
Mr Macklow-Smith said he was planning to increase his weighting in peripheral European banks as the improvements took hold.
But not all European managers are optimistic. Matt Siddle, portfolio manager of the Fidelity European Growth fund, said he was “cautious” on the banks and did not own any.
“I feel the sector’s strong returns since the quantitative easing announcement are unjustified,” he said.
“While low interest rates certainly reduce deposit costs, they also cut returns on loans and securities portfolios. A reduction in sovereign spreads will also impact net interest margins”.
Jake Robbins, manager of the Premier Global Alpha Growth fund, has some concerns and does not hold any European banks.
He recently acknowledged the banks “have performed quite well”, but he thought they were “reflecting quite an optimistic scenario, [given] the economy on the whole remains quite weak”.
Mr Robbins thought the recent spurt of good performance could be another “stutter start”. He added: “We need to see several years of economic growth in a row and then they might look attractive again.”