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, finance heads from major global banks, policy makers and about 800 investors. Most investors answered only some of the questions.
“Europe is by far the preferred equity region for the next 12 months, favored by 56 per cent of pollsters, followed by the US at a distant 20 per cent,” Huw van Steenis, Morgan Stanley’s head of European bank research, said.
“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 favor 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 skeptical 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 that European banks would not “re-rate”, or trade at higher materially valuations, until concerns about future regulatory requirements and capital demands had eased.
Almost half of the investors fear that 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 already been announced.
The next biggest hurdle to re-rating was loan growth, with a quarter saying that 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.
Efforts by policy makers, including trillions of euros of ultra-cheap long-term funding from the ECB, have not yet turned the tide. “Loan growth is key to unlocking value,” said Mr van Steenis.
He was most surprised 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,” said Mr van Steenis.