European Banks – hold or fold?

Just when the consensus was embracing new leadership in the markets by financials, particularly banks, following Mario Draghi’s now famous “I’ll do whatever it takes to save the Euro” speech last summer, another speech, now retracted, by Dutch Finance Minister and President of the Eurogroup of Eurozone finance ministers Jeroen Dijsselbloem that uninsured deposit holders could be asked to bail out (recapitalise) banks in the future as per Cyprus has sent the sector into a tail spin – or at least forced some profit taking.

The question on everyone’s mind is should they avoid investing in European banks? In The Skandia European Best Ideas Fund, while we continue to run a significantly underweight to banks, we do own both BNP Paribas and Intesa Sanpaolo and we continue to hold them despite the recent hiccup.

Why? Quite simply, these companies are seen as national champions that are simply too cheap. For example, while BNP Paribas is up 64% from its 52 week lows it still trades on just 0.58x price to book. Intesa trades on just 0.38x price to book. 

There is a price for everything and the price for these still looks compelling. This month both companies are down by ~7% on the back of Dijsselbloem’s comments because of fears they could be negatively impacted due to the fact around 60% of the revenues for both come from retail banking and both are in countries with economic difficulties and hence run a remote risk that the Cypriot model could be applied to them. We think not.

That said, such bumps in the road should be expected given European politicians propensity to do and say the wrong thing at the wrong time and that is why we continue to run a barbell approach in the fund, mixing higher beta and lower beta names.

Thus, while the few banks we hold have had a hard time of late, the healthcare stocks we own such as Roche and GlaxoSmithKline have hit 12 and 3 month highs respectively and kick off a nice dividend yield of 3-5%. As long as political risk remains the key risk for European investors we will continue to run a barbell portfolio and believe this is the key to successfully navigating the markets.

 

Lee Freeman-Shor is portfolio manager of Skandia European Best Ideas Fund.

  

 

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