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Fidelity - Fundamentals: When boring banking is better


Michael, we've just had a lot of noise about US banks. How are the Europeans doing? Is the worst over? 

It's a very good question. There's been very little noticeable spillover from their peers in the US. They're two very different banking sectors in terms of structure. The European sector is much more highly monitored and regulated, whereas there has been a lighter touch approach in the US, which is to some extent a driving force behind what we've seen over the past couple of months. 

The Europeans look stronger?

Aside from obviously a blip in Switzerland, we’re coming out of a first quarter of results where most of the banks are seeing improving metrics, which is a story that hasn't meaningfully changed. And we don't expect it to meaningfully change in the short to medium term. 

Meaning the banks may be undervalued at the moment, particularly as credit? 

I think there is still a lack of confidence in the sector from the way at least bank credit is being priced. They are still trading wide to non-financial corporates in Europe and there is still a bit of a valuation gap there. There's a hesitancy, particularly after Credit Suisse, for issuers to return to the market. So it does seem to be a cheap sector at the moment: these are good quality credits. 

For “quality”, you mean: debtors I can rely on as the recession hits…

Within Europe, there are still high quality names that are improving profitability on higher interest rates, with very low default levels on their balance sheets. So yes, there is a high quality play there. 

And this after chief executives in the banking sector complained about overregulation. 

There is a view out there now that the European Central Bank (ECB) and European regulators have done a good job. They implemented a raft of banking regulations over the past 10 to 12 years, to the annoyance of some of these banks, who complained about over monitoring and being overly constrained around profitability when their US peers have been a bit more free to increase their returns on equity. 

Every single bank the ECB looks at is required to report on liquidity ratios, on LCR (liquidity coverage ratio) and SFR (stable funding ratio) - the two ratios that have become so popular over the past couple of months. These banks cannot conduct themselves in the same manner as some banks in the US. 

To read the full article click here:  Fundamentals: When boring banking is better (fidelity.be)


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