Are European banks poised for a rebound?
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Are European banks poised for a rebound?

Some research from HSBC and Nomura suggests there could be room for very cautious optimism towards European banking stocks. Yes: you read that right.

In an unusual twist, we came across two reports last week that are positive on European banks – particularly surprising is that HSBC notes that international investors are becoming less negative towards Italy and Spain (Not that that says much since it''s coming from a low base...)

Less negative on Italy and Spain

Many investors have questioned the high holdings we report for the Eurozone given the debt crisis but when we dig a little deeper we find that there is a clear split between an underweight position on Italy and Spain with an overweight position on the other markets (chart 4). There are signs that international funds are edging back into Italy and Spain, but they remain clearly underweight.

What''''s more, HSBC also notes that while, in aggregate, investors are resolutely underweight European financials, within that sector they are starting to show a trend of favouring banks over other institutions. No, really:

Positive signals for banks

The impact of the eurozone crisis is plain to see in the weightings in financials. International funds are overweight in every region except for Europe (chart 5). There is no sign of an increase in holdings in European financials overall but within financials there are the first signs of a switch to banks. Holdings in banks have risen a little but other financials (insurance and real estate) have fallen back (chart 6).



Believe it not, investors may begin to make a slow creep back towards European banks. Adding to the surprising conclusion, Nomura has put out some research suggesting that while lending from banks remains weak, this is due to a lack of credit demand from solvent borrowers that want leverage rather than banks' inability to supply. 

This was the first survey conducted since the LTROs, and is thus important because it shows some evidence of the operations having their desired effect in freeing up the ability of banks to lend.

Instead, the weakness lies in the demand for credit from non-financial corporations. The reduction in demand from this group was more severe than bank loan officers had expected, with a net 30% saying that demand had fallen in Q1. The weakness was driven by a marked decline in capex spend. This is in a sense a ‘normal’ occurrence at this stage in the cycle, though the reduction in capex intensions was certainly intense.

But the tide might be turning:  

The other bullish conclusion that could be drawn from the survey is that a majority of loan officers now expect to see an increase in the demand for loans from corporates over the next quarter, a significant change from the contraction expected over the prior two quarters (Figure 4), they do however expect to see further contraction in loan demand from households, albeit at a lower rate.


At this stage, any crumbs of comfort with respect to European banks are worthy of note.  

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