Bloomberg News

European Banks May Double on ECB Loans, Fund Managers Say

February 29, 2012

A Euro sign sculpture stands illuminated in front of the European Central Bank's headquarters in Frankfurt. Photographer: Simon Dawson/Bloomberg

A Euro sign sculpture stands illuminated in front of the European Central Bank's headquarters in Frankfurt. Photographer: Simon Dawson/Bloomberg

The European Central Bank, which today offered lenders a second round of unlimited loans, will help some bank stocks double this year, say top fund managers who successfully bet on the biggest bank rally since 2009.

Italian lenders such as Banca Monte dei Paschi di Siena SpA and Banca Popolare di Milano Scarl will benefit the most from the ECB initiative aimed at helping banks borrow during Europe’s debt crisis, according to Nicolas Walewski, who manages 2 billion euros ($2.7 billion) in European equities at Alken Asset Management LLP. Other top managers from Mandarine Gestion SA and MainFirst Bank AG are betting lenders including BNP Paribas SA (BNP), France’s biggest bank, may rise by as much as 50 percent.

ECB President Mario Draghi “has shown he’s willing to pump in as much money as needed into the European bank sector,” said London-based Walewski, whose European Opportunities Fund is in the top decile of peers over three years and up 17 percent this year, ahead of 95 percent of its rivals, according to data compiled by Bloomberg. “There’s a strong willingness to continue with the euro zone. This is very underestimated by the Anglo Saxon world.”

The ECB offered banks unlimited three-year loans that carry 1 percent interest in December, reducing the threat of a bank failure in the region. Lenders took 489 billion euros in the first round of the Long Term Refinancing Operation and today borrowed 529.5 billion euros, which was above the 470 billion euro estimated in a Bloomberg News survey.

Bank Shares Rise

The 43-member Bloomberg Europe Banks and Financial Services Index has rallied 34 percent since its two-year low on Nov. 23, the biggest three-month gain since 2009. The index rose 0.5 percent today.

“Italian banks are the most leveraged play and the safest way to play to the LTROs,” said Walewski, 46, who began buying bank stocks early this year. “Italian banks were priced for oblivion until recently,” said the fund manager, who also owns UniCredit SpA (UCG), Italy’s biggest bank. “Some of these banks could easily double still.”

European bank stocks had plunged 41 percent since the start of last year on concern Greece would default, sparking a financial contagion around the continent. The region’s bank stocks traded for as little as half their book value by November, according to data compiled by Bloomberg.

‘Potential Is Huge’

Even after the rally, “banks are still the most undervalued sector in the market,” said Yohan Salleron, Paris- based co-manager of the 925 million-euro Mandarine Valeur Fund (MANDVAL), which has returned 19 percent in the last three months. “Banks have rallied a lot, but if you want a correction of the excess negativity, the potential is huge,” said Salleron, whose three- month and three-year performance beat 90 percent of his peers.

Salleron holds lenders such as BNP and Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, because of their dominance of consumer banking in their home markets and strong balance sheets, he said. The banks should trade at 1.2 times the value of their assets compared with the 0.7 to 0.8 times they are now priced at, he said. That implies a potential 50 percent rise in the share price, according to Salleron’s calculations.

The fund manager’s holdings declined 13.8 percent in the last 12 months, putting the fund in the bottom 18 percent of its peers because Salleron and his co-manager, Marc Renaud, bought into banks too early.

“It was a mistake for us,” Salleron said. “We underestimated the euro-zone debt crisis and underestimated the contagion effects from Greece to Italy.”

Herro Rebounds

He wasn’t the only high-profile manager to make that mistake last year. David Herro, the Chicago-based manager of the $8.5 billion Oakmark International Fund (OAKIX) and Morningstar Inc.’s international fund manager of the decade, underperformed 56 percent of his peer group last year as bets on Credit Suisse Group AG (CSGN), Intesa Sanpaolo and BNP didn’t pay off.

Herro, 52, stuck with the stocks and his fund is up 16.4 percent this year and in the top 4 percentile of its peer group, according to data compiled by Bloomberg. Credit Suisse, BNP and Intesa Sanpaolo have rallied 11 percent to 25 percent since the LTRO on Dec. 8. Herro declined to comment for this story.

The Frankfurt-based central bank is flooding Europe’s banks with cheap money to head off a second credit crunch in four years, sparked by Greece’s inability to pay its debts and surging bond yields. Under the program, banks can borrow from the ECB at 1 percent and invest the proceeds in 10-year Italian government bonds yielding 5.35 percent.

The so-called carry trade will help boost banks’ earnings by 5 percent to 10 percent and improve liquidity, Walewski said.

Higher demand for sovereign debt has helped reduce yields, making it easier for southern European countries to fund themselves. Spanish five-year bond yields have dropped to 3.58 percent from 6.24 percent since the LTRO was announced in November.

‘No Risk’

“The ECB is putting a floor on the financial system and is flooding the market with sufficient liquidity,” said Olgerd Eichler, 44, who manages the 640 million-euro MainFirst Top European Ideas Fund (MFTPEIA) in Frankfurt. “In the short term there’s no risk of any failure, but in the long-term the economy must pick up,” he said.

Eichler’s fund, which is in the top 2 percent of its peer group over the last three years, has almost 20 percent of its assets in bank stocks, including BNP, Spain’s Banco Santander SA (SAN), ING Groep NV (INGA) and UBS AG (UBSN), Switzerland’s biggest bank. If the euro region’s economy recovers from its 0.3 percent decline in gross domestic product in the fourth quarter of last year, banks may rally by at least 30 percent, he said.

Priced In?

By contrast, much of the LTRO’s benefits may have already been priced into bank stocks, according to Zurich-based Tom Stubbe Olsen, manager of European Value Partners AG’s value fund, which has 900 million euros of assets and has beaten 86 percent of rivals over the last three years.

“Sell-side analysts are now upgrading banks,” said Olsen, who owns UBS stock. “The question is whether a good part of the run has already been made on this adjustment to the new environment that the ECB has made.”

That doesn’t concern Walewski, who founded Alken Asset Management in 2005. “A lot of outsiders in New York and London have totally misread this situation,” he said. “People will work very hard to make Europe work. The tide is already beginning to turn in Ireland, Italy and Spain.”

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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