Restructuring is not enough to make the French and German banking sector look an attractive investme...
Restructuring is not enough to make the French and German banking sector look an attractive investment.
Recently, the way was apparently left clear for BNP to take control of Paribas but this kind of consolidation is unlikely to solve the inherent structural problems in the sector, managers believe. In addition, expectations of interest rate rises have led managers to assume a squeeze on lending margins and to underweight portfolio positions in the sector.
Alister Hibbert, fund manager at INVESCO, says: "German and French banks have got structural problems and will struggle with the emergence of a corporate bond market. The big Frankfurt banks concentrate more on lending to medium-sized corporates than on the retail market.
"With the development of a corporate bond market companies can bypass the banks and get necessary gearing from the market. On the investment banking side they are weak when compared with the US groups such as Merrill Lynch. These are being favoured when it comes to privatisation mandates and the like.
"The banks I am exposed to are the Irish and Spanish ones which are more retail oriented. These economies are growing relatively more rapidly leading to a bigger demand and ability to lend more money. The investment bank I do favour is Credit Suisse First Boston which has developed a US management culture.
The anticipated increase in demand for mutual funds in Europe could offer new business for German banks such as Deutsche. Hibbert said: "Deutsche has got a good mutual fund arm and it might be a source for new business growth but this growth and good performance could be diluted as it rolls out into investment banking.
Johnson Fry is less bearish about the banking sector viewing some of the merger and acquisition activity as positive. Rupert Morrell, fund manager at Johnson Fry, says: "The Spanish bank BSCH, which is the result of a recent merger, is a good example of the benefits of consolidation. It has a strong domestic position with a fantastic franchise in Latin America.
"You also have to be cautious when looking at M&A activity. In Italy the integration of two banks into one does not appear to be going well due to a lack of experience. Good M&A activity must increase market share and cut costs.
Aberdeen Asset Management has not favoured the banking sector since the start of the year. Adrian Fowler, fund manager at Aberdeen, says: "Though interest rates are near record lows at 2.5%, I expect a rise in the next six months. This will not be good news for the sector as lending becomes more expensive. In addition there is the threat of increased competition particularly in the retail market. Branches are closing as customers convert to telephone and internet banking. As more people switch to these forms of banking more internet banks will be set up.
The expectation of an increase in interest rates is partly due to the weakening of the bond market as yields rise. Morrell believes the bond market has overreacted and prices of insurance companies have come off too far. This fall has led Fowler to prefer insurance companies to banks.
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