Bargains in the banking sector

Many of Europe's banks still look pretty haggard, says John Stepek. But if you look carefully, you might just find some bargains.

It's been a pretty miserable week or so for the banking sector. That's nothing new the banks (and their investors) have barely seen a glimmer of good news since the financial crisis kicked off in 2007. The latest excuse for investors to express their contempt for the sector came last Friday. After the markets closed, the European Banking Authority, Europe's banking watchdog, released its latest batch of stress-test results.

The tests are pretty much a PR exercise, with no explicit "pass" or "fail" mark as Larry Elliott notes in The Guardian, "they are designed to impart confidence, to explain that things aren't quite as bad as they appear to be".

They failed miserably at that particular task. Beyond telling us what we already knew that Italy's Monte dei Paschi couldn't stand up in a strong breeze, let alone another financial hurricane the tests don't really add much of any use.

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The reality is that the collapse in the share prices of banks across the globe this year tells us that markets have already passed judgement on the sector. Both Deutsche Bank and Credit Suisse are about to be dropped from the STOXX 50 index the European blue-chips due to the precipitous collapse in their share prices. Both banks have lost about half of their value this year alone, and Deutsche's share price is now 90% below where it was at its 2007 peak.

The stress tests don't help matters. They don't advance any sort of solution to the eurozone's banking woes, which are all about the problematic politics of sharing a currency and yet being unable or unwilling to come to a collective decision to bail out and recapitalise the hardest-hit banks.

If anything, they just emphasise how far away Europe is from reaching any lasting answer to its banks' woes without another major eurozone crisis erupting to force its hand (perhaps triggered by Italy's referendum on constitutional reform in October).

However, it's all too easy to tar every bank with the same brush. While Europe's banks are caught in a grim sort of limbo state, both the US and the UK have made more progress in "fixing" their banks. RBS and, to an extent, Barclays still look somewhat war-torn. But in other cases, you can easily argue from a contrarian point of view, certainly that regardless of how much you detest the banking sector, it would take a heck of a big economic hit to justify share prices remaining where they are currently.

This is something that James Ferguson of the MacroStrategy Partnership has written about in MoneyWeek in the past. However, in this week's cover story, Charlie Morris of The Fleet Street Letter adds a really interesting twist.

Not only do banks look cheap, but they could be one of the best ways to play what will end up being one of the biggest stories of this financial era the bursting of the global bond bubble. Charlie explains all including his favourite tips in the banking sector.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.