Rising interest rates and fierce internet competition have led fund managers to remain underweight i...
Rising interest rates and fierce internet competition have led fund managers to remain underweight in banking stocks.
The two factors are seen as near guarantees that the sector's poor performance will continue. It is down some 8% in euro terms year to date compared with a 4% overall rise in the European market.
Steve Roper, European investment manger at Britannic Asset Management describes banks as the major losers amid the internet revolution.
He says: "There will be little need for high street banks as internet banking becomes increasingly popular. They are much cheaper to run and the administration is more flexible. Many of the banking companies are adopting an internet strategy and those who don't will be the big losers."
Although underweight in the banking sector, Britannic owns Deutsche Bank and Credit Suisse, in a bid to concentrate on those with a coherent internet strategy already in place.
Roper says: "There are some banks out there which are ahead of the competition by developing internet strategies and offering these services to their clients."
He says as well as offering internet services, both companies have dynamic management which have positioned both these companies to have big slices of market share in Germany and Switzerland.
He adds: "In the case of Credit Suisse, this bank is offering fund management services over the internet, therefore catering for the growing demand for investment products in Europe."
Credit Suisse is trading on 2.5 times price to book ratio but this is ahead in developing addressing an internet strategy while Deutsche Bank is on a price to book ratio of 1.5 times.
Although other banking stocks in general seem cheaper than this, Roper says there is good reason for these low valuations.
He adds: "Competition from the internet is a real negative and as it continues to increase, high street banks will have to turn to the internet and adopt their own strategy. While this will eventually help these banks to cut their costs, the net effect of competition is that prices will continue to fall."
Whether this scenario comes to pass or not the continued focus on technology, media and telecoms stocks is exacerbating the poor performance of the banks.
Chris Rice, fund manager at HSBC, is even more negative and thinks even an e-strategy cannot redeem these financials. He says: "The internet is a negative because we do not believe the banks can reduce their traditional distribution cost base quickly enough to justify the move into internet banking.
"The banks will retain their customers through moving to internet banking but they will not be able to reduce their employee numbers and capital quickly enough and profits will fall in the internet age."
Rice is positive on other financials which are customer oriented and have multi distribution channels.
Examples here are Skandia, an asset manager, Dipop, a multi channel financial services provider, and MLP, a specialised life assurance and asset management company in Germany.
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