Europe may have roughly $1.2 trillion in non-performing loans, but to DNCA Finance's Citywire + rated portfolio manager Isaac Chebar banks in that region continue to offer opportunities.
‘The European banking system is not broken. It’s in a difficult situation but it’s not broken,’ said Chebar, manager of the DNCA Invest Value Europe, a $1.2 billion fund he runs alongside Maxime Genevois and Citywire AA-rated Don Fitzgerald.
‘The [banks] did three things: they increased capital; they retained capital by not paying dividends; and they deleveraged the balance sheets, which necessitates less capital. So in a sense, the banking system in Europe today is much more controled and capitalized than it was seven years ago.’
European banks are now at the end of their recapitalization process, with banks such as Credit Suisse injecting $5 billion of cash into their balance sheets, Chebar said.
He added that it’s likely the geopolitical environment for European banks can only improve as time goes by.
‘You have deposits at the European Central Bank at minus 40 basis points. You don’t have an increasing net interest income. And the deposits are growing because people don’t know what do with money. Do you think you can have a worse environment? You can, but it’s difficult,’ he said.
Chebar recently bought into a capital increase for Italian bank UniCredit, an investment from which he expects a 30% upside in the next two years or so.
More broadly, he said he has found opportunities in the oil sector, which has offered attractive valuations for value managers as other investors have grown weary of the industry’s prospects with the rise of shale and electric cars.
‘It’s very difficult to predict demand and it’s very difficult to predict supply,’ Chebar said. 'The markets just took a view and have been hammering oil prices. I think the market is a bit too negative on oil,’ he said.
After roughly seven years as an outcast, Europe has become more attractive to investors as earnings growth has picked up. That trend could continue, Chebar said.
In terms of valuations, he added markets have signaled that earnings growth of European companies are still underestimated and while some may not be cheap, they will continue to offer attractive valuations in absolute terms, even if they’re trading at 17 times earnings.
Opportunities in Europe go beyond earnings growth perspectives, however. For Chebar, Europe’s return to favor has more to do with investors adapting to its improving political landscape after the defeat of populist leaders in elections across the continent.
‘Two years ago everybody thought [Europe] was going to break up, that the euro was going to break, populist parties will win, that the economy will not grow forever. Actually, again and again, perceptions are contradicted,' he said.
The DNCA Invest Value Europe has returned 14.58% in the past year, while its Citywire-assigned benchmark, the FTSE World Europe TR EUR, has risen 17.59%.
France-based DNCA Finance is part of the Natixis Global Asset Management group.