By Julien Ponthus
LONDON (Reuters) - Euro zone bank stocks may have never been cheaper, but many long-term investors remain deeply wary of a sector labelled the ultimate 'value trap' after a decade of scandals and underperformance since the financial crisis.
With the coronavirus crisis and its damaging economic impact adding to their troubles, the euro zone banking index (SX7E) was worth about 40% less at Friday's close than in 2009, while the broader stocks index (STOXX) had more than doubled.
By contrast, some investors expecting an economic turnaround in the United States have piled back into U.S. bank stocks, despite caution that positive stress test results and lower loan losses will be needed for a sustained rally.
"You now have a whole generation of portfolio managers for whom being underweight on banks has been the trade of the last decade", Magdalena Stoklosa, head of European banks at Morgan Stanley (NYSE:MS), said of the reluctance to buy and hold the stocks.
This is despite the market capitalisation of euro zone banks being only 40% of their book value, well behind their U.S. peers, which are trading on a ratio of 1, data from Refinitiv Datastream shows.
Although so-called value stocks, firms whose fundamental worth is not reflected in their share price, have lead a recent market bounce, banks are unlikely to follow suit.
A spike in loan defaults triggered by economies shutting down and forecasts of the worst recession in a lifetime has added to wariness, after years of negative interest rates, rising capital and compliance costs and new rivals.
But because euro zone banks have spent a decade building up their capital ratios, there was no immediate stress when the coronavirus pandemic hit, unlike sectors such as airlines.
And unlike the 2008 financial crisis, when they were the problem, some see banks as having a key role in repairing the extensive economic damage wreaked by the coronavirus pandemic, with most European recovery plans relying on them to channel emergency state-back loans to businesses big and small.
However, this has not yet made them more attractive.
"I do not think that it makes sense to currently invest in this sector", says Klaus Kaldemorgen, portfolio manager at DWS, noting that profitability was an issue before the pandemic.
(GRAPHIC - Euro zone banks missed the record bull market: https://fingfx.thomsonreuters.com/gfx/mkt/xegpbydklvq/Pasted%20image%201592213555777.png)
For many investors, a lack of capital gains in recent years had been somewhat compensated by competitive payouts. But the euro zone banking index's dividend yield slipped to a record low after the European Central Bank told banks to skip payouts and use profits as a temporary additional capital buffer.
"A lot of investors won't touch banking stocks for a very long time", Martin Moeller, co-Head of Swiss and Global Equities at UBP, said pointing to insurers or pension funds which typically need returns to fund their own liabilities.
(GRAPHIC - Euro zone banks: dividend cancellations last straw?: https://fingfx.thomsonreuters.com/gfx/mkt/xklpygwkbpg/Pasted%20image%201592213931222.png)
While they may have little appeal for long-term investors, euro zone bank stocks are not entirely out of favour.
They are seen as a proxy for trading short term improvements in sentiment, such as the period between mid-May and the beginning of June, when banking stocks surged close to 50%.
(GRAPHIC - Euro zone banks price to book ratio: https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkdwrqpm/Pasted%20image%201592214604072.png)
A number of brokers and investments banks saw an opportunity in cyclical shares such as banks after the European Union's plan to launch a massive recovery fund and the ECB's decision to pump its coronavirus pandemic stimulus up to 1.35 trillion euros.
Italian and Spanish banks in particular gained on greater confidence about the euro zone's ability to weather the crisis.
"As a tactical trade, we're still pushing banks", Edmund Shing, global head of equity derivatives strategy at BNP Paribas (OTC:BNPQY), said last week.
But he is only betting on a limited recovery.
"As banks go up, obviously, we're looking more to cash in than to extend that trade," Shing added.