Investors expect European banks to outperform, key survey finds
BRUSSELS, BELGIUM - OCTOBER 24: European Union flags are pictured outside the European Commission building on October 24, 2014 in Brussels, Belgium. Alongside criticism from outgoing European Commission president Jose Manuel Barroso on the UK's stance on EU immigration and a plan to quit the European Court of Human Rights, the UK has now been told to pay an extra £1.7bn GBP (2.1bn EUR) towards the EU's budget because its economy has performed better than expected. (Photo by Carl Court/Getty Images)©Getty
European banks will beat other financial sector investments this year but valuations will not catch up to international peers until regulatory uncertainty fades and loan growth picks up, a survey of investors by Morgan Stanley has found.
The bank polled about 200 investors at a recent closed-door London conference that attracted about 120 chief executives and finance heads from global banks, as well as policy makers and about 800 investors. Most investors answered only some of the questions.
“Europe as a whole is by far the preferred equity region for the next 12 months, favoured by 56 per cent of pollsters, followed by the US at a distant 20 per cent,” said Huw van Steenis, Morgan Stanley’s head of European bank research.
“Forty per cent of the investors polled think European banks are going to outperform in the next 12 months, while a close 30 per cent favour diversified financials. Insurers have lost ground and only 13 per cent of voters thought they would outperform this year.”
European banks have traded at a discount to US peers since mid-2009, as investors bought into American banks’ post-crisis restructuring and remained sceptical about their transatlantic cousins’ progress. Now, the MSCI US banks index is priced at about 110 per cent of its constituents’ book value. The MSCI European banks index is priced at about 90 per cent.
About a third of investors said European banks would not “re-rate”, or trade at higher materially valuations, until concerns about future regulatory requirements and capital demands eased.
Almost half of the investors fear the European Central Bank will set a common equity tier one ratio of at least 12 per cent for the 130 eurozone banks it supervises, well above the 4.5 per cent demanded by international rules and the 8 per cent set in the ECB’s recent stress tests.
More than half expect European banks to raise at least €20bn of equity this year over and above equity raises that have already been announced.
The next biggest hurdle to re-rating was loan growth, with a quarter saying it was a necessary precondition for improved banks’ valuations. Bank lending contracted sharply during the eurozone crisis, as demand fell in recession-hit countries and banks grappled with new regulations compelling them to have more capital relative to their loans.
Numerous efforts by policy makers, including trillions of euros of ultra-cheap long-term funding from the ECB, have so far failed to turn the tide. “Loan growth is key to unlocking value,” Mr van Steenis said.
He said he found the most surprising finding to be the fact that almost 60 per cent of respondents believed the cost of equity for banks should be 7-9 per cent, the lowest level at which investors have priced since 2007.
“Investors are reassessing the sector’s risk, prompted by QE [quantitative easing] and a perception that the uncertainty in banks’ share count is now perceived to be as low as it’s been since the crisis,” Mr van Steenis said.