F&C European Equity Team positive on banks

Banks remain a highly topical and contentious issue, with the focus shifting intermittently between too high charges, too little lending and bankers' remuneration.

Both the Government and the FSA are keen to increase levels of regulation to ensure the events of 2007-08  will never be repeated, particularly the required levels of capital and liquidity, along with raising taxes, as a means of pre-funding any future issues. Couple this with de-leveraging and a reluctance to lend and it is easy to understand why many remain cautious on investing in the banking sector. Nevertheless, David Moss, Director, European Equities at F&C, believes pockets of opportunity remain.

"Hundreds of billions of bad assets have been written off already and yet capital levels have been replenished by rights issues, debt swaps and retained profits to levels at around 50% higher than pre crisis. Profitability as measured by return on equity is rising again, albeit to levels far below pre-crisis but this is arguably better quality profits. Furthermore, leverage is down and margins are higher as competition has fallen and barriers to entry have arguably risen. In most overseas markets, banks have withdrawn or greatly reduced their exposure while many non-bank lenders have disappeared and capital, liquidity and regulatory requirements have all risen," he said.

Moss acknowledges that the outlook is not the same for all banks; however, there are now openings for higher quality, better funded institutions to take share in European markets where they previously struggled to compete.

Moss concluded: "There are still many problems ahead but the peak in bad loans seems to have passed. We would argue that valuations give a reasonable margin of safety whilst many banks are valued at little more than the book worth of their assets; dividends are returning from many institutions. All this allows us to feel more positive than most on the prospects for the institutions referred to above."