The key is the yield curve, or rather its gradient. In recent years, as interest rates in developed markets have headed toward zero and quantitative easing has continued apace, so yield curves have flattened and bank margins have shrunk. But, on the evidence not only of the BoJ and Fed decisions on Wednesday, but also recent comments by the European Central Bank, there is a growing desire on the part of central banks to see a steepening in the curve.
While the BoJ’s latest foray into untested monetary policy has so far received a mixed reception, it does directly address concerns over the steepness of the Japanese government bond curve. Equally, a second rate hike is now expected in the US in December, following the growing dissent within the committee – three members voted to hike in September. This increase would be expected to be positive for the banking sector.
Likewise, there are growing noises from within the ECB that not only should the yield curve steepen, but also that regulation needs to, perhaps be reconsidered.
In a speech three days ago by, Yves Mersch, a member of the executive board of the ECB, said, while addressing financial sector weaknesses was an important step in the recovery of the global financial system following the collapse of Lehman Brothers, regulators also “need to keep in mind the challenges banks are facing as they adapt to a new operating environment.”
It is for these reasons that Nicolas Walewski, manager of the Alken European Opportunities Fund said it is planning to step up its exposure to the sector.
For Olly Russ, manager of the Liontrust European Income Fund it is also for these reasons that “banks are about to become interesting”.
Speaking at an investment dinner in London, Russ told Portfolio Adviser that, while he currently prefers insurers and some Italian asset managers, “if we have seen a bottoming in interest rates in the US, value could be poised to outperform and the value is in financials, where yields are highest and price earnings ratios are lowest.”