(Bloomberg) -- A decade after the financial crisis, it’s time to look at European banks again, according to Allianz Global Investors.
“We’ve been warming up to banks, but coming from the ice age to normal takes time,” said Joerg de Vries-Hippen, chief investment officer for equities Europe at Allianz GI, who oversees 53.3 billion euros ($66 billion). “Not to be in banks could be a mistake, but that doesn’t mean you have to be in all banks. You have to buy the right banks.”
That one of Europe’s top institutional investors has steered clear of such a big sector since the crisis, and is still comfortable underweighting it against the broader Stoxx Europe 600 index, speaks volumes for the challenges facing banks.
Record low interest rates -- below zero across most of the continent -- have squeezed the lending margins that traditionally generated bank profits. Short-term interest rate futures suggest that the European Central Bank’s official rates will stay at or below zero for at least another year.
Moreover, technology -- now with the support of regulatory initiatives such as the European Union’s Payment Services Directive 2 -- is tearing down barriers to competition on payments and related services, another cash cow for banks.
Still, the investment case for banks has improved. Regulators have pushed lenders to raise capital and be more honest about the state of their assets. Global standards for making banks stronger are finally clearer, giving lenders visibility on how much capital they need. Most importantly, growth and credit demand have returned. As a result, valuations have normalized. In the Bloomberg Europe 500 Banks and Financial Services Index, the median price-book value ratio is now 0.98.
De Vries-Hippen said he sees “good banks” in the Netherlands after the Dutch government did “a great job” repairing the damage done by the financial crisis and a domestic real-estate lending bubble. Italian banks are also becoming more attractive, he says, “but I’m not as enthusiastic as with the Dutch or French.”
German bank stocks, meanwhile, continue to suffer from the country’s proliferation of smaller, less profitable lenders, he adds.
Nordic banks were on Allianz GI’s list of interesting investments earlier on, “but we now have an issue with the real estate market and are cautious about the banks,” he said. Data compiled by Bloomberg suggest that AGI took some profits on its Swedbank position toward the end of 2017, but still holds a reduced position.
Since the second half of last year, Allianz GI has bought shares in banks including France’s Credit Agricole SA, ABN Amro Group NV of the Netherlands and Milan-based UniCredit SpA, data compiled by Bloomberg show.
“The world economy is going well,” said de Vries-Hippen. “Europe is working much better.”
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