“The pan-European bank sector has fallen by 17% with the Italian banks the significant under-performer in the region,” said Pras Jeyanandhan, investment analyst at SYZ Asset Management.
“With key elections coming up in Italy, the Netherlands, France and Germany over the next 18 months, the fragility of the European bank sector has come back into focus. A breakup of the European Union would be a major risk for banks,” he said.
Valuations have dipped close to levels seen during the financial crisis in 2008 and 2009.
Old Mutual Global Investors portfolio manager Rob Weatherston said the cheap valuations of banks, which are “pretty low everywhere”, made him worry that another financial crisis might unfold. He said that's the biggest risk for his fund in the coming 6-12 months.
An environment that has an increasing potential for a financial crisis could negatively impact global investor sentiment, resulting in plunging bank shares, poor equity markets and falling house prices, Weatherston said.
"We haven’t actually answered the underlying question: how do you make banks profitable in a world of negative interest rates?"
Deutsche Bank, HSBC and Credit Suisse were named by the International Monetary Fund last week as the riskiest banks in terms of risk management and cross-border exposure. Deutsche also failed the stress test in the US the same week.
Meanwhile, “the Italian banks, which have failed to deal with their bad debts, are seen to be in crisis and in need of recapitalisation,” Jeyanandhan noted.
Martin Currie, a fund house under Legg Mason, saw short opportunities in the UK and European financial sector.
“We haven’t actually answered the underlying question: how do you make banks profitable in a world of negative interest rates?” said Michael Browne, who co-manages Martin Currie’s European equity long/short strategy.
He expects the banks to face “significant cuts to their margins” on the way to 2018.
“You’re then starting to ask questions about the overall prospect for house building and other areas. This could prolong a period of economic gloom through a recession,” Browne added.