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10 February 2012: SH: Pan European banks: a strong start to 2012

Reviewing Pan European banks’ performance in 2012, and assessing the opportunities and threats that lie ahead….  

Justin Bisseker, European Banks Analyst

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    For professional investors and advisers only.This document is not suitable for retail

    2012 to date has seen the Pan European bank sector rally almost 20%; 10% outperformance against the market. The infusion of liquidity into the market from cheap three-year ECB Long-Term Refinancing Operation (LTRO) money, coupled with some encouraging signals from the US economy have led to a sense of renewed optimism among investors. 

    However, while – unlike some – we see banks very much as an investible sector where we can make money, it is also a sector where a cautious investment stance remains appropriate. We saw a similar rally this time last year as well as in mid-2010. Both were undone by euro and regulatory concerns.

    The key positive for the sector remains valuation – in absolute terms and against history. A credible euro solution, coupled with success in dodging a material recession in Europe could easily see the sector rally 30-40% from here. Sure, banks in the periphery of Europe face numerous pressures, but these banks (in Spain, Italy, Ireland, Portugal and Greece) account for just 20% of the sector. In this sense – at a sector level – the drag is contained.

    The key negative is that the euro crisis is unlikely to be resolved without further pain. Greece, in particular, represents a material pothole on the road to redemption. In addition, regulatory pressures will continue to bite over time while many banks (and their customers and governments) are likely to face a protracted deleveraging cycle – hardly a healthy backdrop for the sector. 

    We continue to favour banks, which have an ability to carve out attractive returns for shareholders and which are already broadly compliant with future regulatory norms. Different banks in Europe will likely face materially different prospects. The market still fails to reflect this appropriately (as is typical when the market moves in a top-down indiscriminate manner) – an opportunity for the active stockpicker.  

    The views and opinions contained herein are those of the Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

    For professional investors and advisers only.This document is not suitable for retail clients.

    This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.

     Source: IFAWorld – Schroders

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