A market-beating surge in euro-area bank stocks has further to run, according to a top-performing fund manager who says the mayhem triggered by the collapse of Silicon Valley Bank is obscuring the favorable backdrop for lenders.
(Bloomberg) — A market-beating surge in euro-area bank stocks has further to run, according to a top-performing fund manager who says the mayhem triggered by the collapse of Silicon Valley Bank is obscuring the favorable backdrop for lenders.
Varenne Capital Partners bought call options on the Euro Stoxx Banks Index in October because of the environment of rising interest rates and rock-bottom valuations, Varenne managing director David Mellul said. The investment represents about €2 billion of notional exposure to banks, he said.
The index lost 10% over Friday and Monday, the biggest two-day drop in a year. Still, the index is up by about a third since the end of September, and Mellul says he remains optimistic. European lenders have a lower exposure to crypto currencies and to technology companies — areas that led to the collapses of Signature Bank and SVB — and are much more focused on consumer banking and asset management, he said.
“We think the European banking system is shielded from the SVB shock wave and we don’t expect any major repercussions,” he said Tuesday in an interview.
The bet on European banks has helped the firm, which has €3.1 billion of assets under management, outpace the market. Its Varenne Selection fund is up 8.8% this year through Friday, outpacing the Stoxx Europe 600 Index’s 7.2% return and beating 79% of competing funds.
Banks have benefited from the end of years of near-zero interest rates. They’ve been able to charge higher interest on loans while increasing the rate they pay on deposits more slowly. That fatter interest margin should persist even though some investors now expect the European Central Bank and the US Federal Reserve to reduce the pace of interest-rate hikes, Mellul said.
“We think that the current monetary environment is good enough to allow European lenders to reconstitute their profit margins,” he said, adding that fourth-quarter earnings also supported the investment case. The Euro Stoxx Banks Index tracks 22 banks from countries that use the euro currency, meaning it has no exposure to the most troubled lender in the region, Credit Suisse Group AG.
“Fundamentals are healthy and of course names already under pressure such as Credit Suisse are feeling the heat but it doesn’t change the big picture,” he said. “The investment case we had on European banks has not changed.”
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