Despite restructuring of the banking sector in Italy and France, the overall outlook for European b...
Despite restructuring of the banking sector in Italy and France, the overall outlook for European banks remains dependent on economic growth.
James Alexander, fund manager of M&G European Financials, says European banks tend to be very domestically focused and are therefore dependent on the economic performance of their home countries.
According to David McCraw, manager of the Edinburgh Financial fund, Spanish and Scandinavian banks are therefore likely to do well because of their positive GDP growth but he did not favour the banking sector in Germany and Italy.
However, weakness among some players in the sector could trigger a round of restructuring to drive stronger performance in the future.
'There are too many banks in Europe and restructuring and takeovers will reduce these numbers and generate bigger and stronger banks,' says McCraw. 'It will take out some of the cost base and improve profitability.'
But McCraw adds the region is unlikely to see cross border deals in the short to medium term so banks are likely to remain local for some time yet.
Alexander notes many European banks are still nationalised or at least part government-owned. He believes privatisation will make the sector more attractive once management becomes more profit-driven.
Global equity weakness has hit insurance companies and investment banks equally badly. Alexander says: 'Because of market performance, solvency of investment banks and insurance companies was brought into question in the first quarter of this year and investors were fearing a systemic crisis. Investment banks and insurance companies are generally very reliant on market performance because they hold equities. In the UK, investment banks were not badly affected because their equity exposure was low but the equity holdings in UK insurance companies were hit.'
While investment banks have performed poorly, commercial banks have fared well due to a buoyant housing market and retailing sector. McCraw says as a result of an upsurge in remortgaging and good retail sales, US and UK commercial banks have remained profitable.
However, the benefits of strong consumption and a booming housing sector are being offset by a sluggish corporate sector. Company expenditure has still not picked up and Alexander says the low interest rate environment is negatively affecting banks.
He adds: 'Low interest rates are good for businesses because it reduces their debt burden but it can be detrimental for banks because it squeezes margins. In the US where interest rates are very low at 1%, banks are hoping loan volume will pick up but companies are reluctant to invest.'
Bad debts have been fairly stable, however. With high profile company failures like Enron and WorldCom in 2002, McCraw says there were concern that bad debts would rise this year but because globally there has not been any crisis, bad debts have been reasonably steady this year.
The bank and financial services subsector of the Bloomberg 500 is up 8.1% over the year to 4 July, compared to an overall index rise of 1.36% in euro terms.
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