15/05/17

European managers split on crucial financials call

Speaking at Portfolio Adviser’s Europe 2017 event, Invesco Perpetual’s head of European equities Jeff Taylor took a positive stance on banks, and wider financials generally as a traditionally “unloved” sector, reports Portfolio Adviser.

Pointing to strong bottom-up fundamentals, he said prices had been unfairly affected by the uncertain political climate.

He explained: “There wasn’t enough capital in the banks in 2007/08, but the vast majority are comfortably capitalised now, as they deleveraged by selling portfolios of assess, sold businesses, or set up a rights issue, for example.”  

Taylor argued that this generated much liquidity and that loan-to-deposit ratios are only fractionally above 1%, which is very positive.

Chris Garsten, manager of Waverton European Capital Growth, has a quite different perspective. His angle was that he only invests in stocks that have undergone a sea change in the way they were run.

He said: “Traditionally European companies have been run for volume and so the balance sheets are opaque. We are looking for companies that have started to become shareholder friendly by providing earnings visibility.” 

Garsten does not think banks fall into this category.  He said: “Financials had a very poor business model up to the credit crunch, but the problem is they are still being run for growth. You get the idea that they think ‘If I don’t make the loan someone else will’.”

Garsten also argued that new changes in the financial markets in terms of required upgrades to mainframe IT systems were causing problems for the industry.

“A lot of them are working on huge IT upgrades, these can take four years to implement by which time they are legacy systems.

“Another problem for the banks is that it is a commodities industry”, he argued. “Everything is online, and as such these banks only provide commodity returns”.

That several European banks are still looking for financing is also cause for concern, he said: “Deutsche Bank and Credit Suisse have recently asked for more money.”

He added: “People argue that the worst is behind them, I’m not sure.”

AB CIO Tawhid Ali was more moderate than the other two speakers. He argued that there was a downside with European banks because many were oligopolistic, but that the management teams had been largely reformed and they were now being run like utilities. “This reduces risk in the sector,” he said.