LONDON (Reuters): When fears of a Greek default are mounting, stock markets are jittery at multi-year highs, and the world’s biggest economy is preparing to hike interest rates, the idea of taking refuge in bank stocks might appear to be a hard sell.
Yet that’s exactly what some investors and brokers are recommending, on the basis that the sector is cheap, has been scrubbed cleaner post-crisis and may be able to pass on higher rate costs to clients in an improving economy.
“With some of the classic safe havens like precious metals and less risky stocks providing little protection, we believe investors should consider some less obvious places,” BlackRock Global Chief Investment Strategist Russ Koesterich told clients last week.
“One is the financial sector, with banks a potential beneficiary of higher rates.”
It would not be the first time investors have picked up banks again since the financial crisis, though eye-popping fines have left some with burnt fingers.
But Citi research suggests that European banks’ annual litigation provisions are expected to fall by more than half this year. And meanwhile valuations suggest banks are the only bargains left.
The banking sector is still cheap relative to others: global banks trade on a price-to-earnings ratio of around 12 and a price-to-book ratio of around 1, one of the lowest-rated sectors.
Big European names like Deutsche Bank, Credit Suisse and HSBC are even cheaper.
There’s also a lot of optimism among investors about the arrival of new management at Deutsche Bank, Credit Suisse and Standard Chartered. Banks have regularly been pitched as restructuring plays; the hope this time is for more aggressive changes, whether on capital or business lines.
There are caveats, of course. Atlantic Equities analyst Chris Wheeler said a rise in rates was only good if it was gradual and if income from loan-books got more of an upward jump than payouts to depositors. This would tend to benefit strong retail or corporate lenders rather than pure investment banks.