Morgan Stanley’s euro equities head bullish on banks

The widespread negative coverage of Europe's banking sector papers over purchasing opportunities, according to Morgan Stanley Investment Management's head of European equities.

Speaking at the firm's European Outlook event in London, Matthew Leeman said he is currently underweight financials as a whole but, upon delving into his stock selections, he revealed he has adopted an overweight position on European banks in his portfolio, the $1.4 billion Morgan Stanley European Equity Alpha Fund.

Discussing the investment bank’s European outlook, Leeman said there had been a broad compression of valuations across all sectors and this was nowhere more evident than in the banking sector.

And, while some investors will be turned off by negative headlines and the prospect of reducing returns due to tougher banking regulations, Leeman said there would be a host of opportunities in this sector.

‘There is going to be more regulation, requirements to hold more capital and less leverage and that will mean lower returns, everything being equal we can’t argue with that,’ he said. ‘What people fail to acknowledge is the other side of the coin is that means less risk.’

His comments come hot-on-the-heels of top French manager Jean-Charles Mériaux of DNCA Finance who said he has added a European bank to his portfolio for the first time since the crisis.

Credibility

Leeman began to add banks to his portfolio at the start of the summer and increased his holdings as the eurozone crisis worsened. He said his decision was further buoyed by the European Central Bank’s decision to offer liquidity to European banks.

‘When you look at the measures which have been put in place by the ECB, which, in my view, is one of the only institutions still operating with credibility, I think the impact of measures such as the LTRO have been under-estimated because it goes an awful long-way towards resolving the funding issue,’ he said.

The LTRO – or longer-term refinancing operation – is a €489 billion initiative launched in December 2011 aimed at offering European banks a short term opportunity to access liquidity.

UK and France

Leeman revealed he has invested in BNP and an unnamed British bank but refused to be drawn on revealing more names. He added, despite being upbeat on some opportunities, he did expect some banks in the region to struggle.

‘There are banks in Spain and in Italy that are trading at 0.3 or 0.4 tangible book value and they are going to be a long way away from getting a return in excess of their cost of equity,’ he said.

Leeman's comments serve to add more fuel to the fire of an issue which is currently dividing investors - whether to pull out or pile into European banks. A recent Citywire Global reader survey canvassed opinion on just this, highlighting that sentiment has veered towards bearishness in recent weeks.