AQR - What do selectors and managers expect?

Jonathan Boyd


Fadi Zaher, head of Bonds and Currencies at Kleinwort Benson, believes that the AQR and more generally, the ECB’s comprehensive assessment will be a milestone to harmonise the banking system across Europe.

“Europe big problems in solving problems in Italy and Portugal and Spain will be better off,” he notes, adding that should aid transparency in the European banking system, and facilitate more like for like comparisons of bad loans between, for example, Italy and the UK.

Zaher says he is not particularly worried about the results that will emerge from traditionally more complicated banking sectors affecting Italian, Spanish and Portuguese banks, especially when it comes to the retail side.

“From an investment point of view, we are not looking away from countries like Portugal, Italy or Spain, where big retail banks have certainly done their homework in view of the AQR. I am personally more concerned about smaller banks such as Bankia and Banco Popular in Spain as they strongly rely on the euro-system funding.”

Papa adds to that: “Peripheral countries have perhaps been more incentivised to do their homework because the perception doesn’t work in their favour, which makes it more costly for them to hold NPLs, consequently, the level of impairments and provisions in Spain or Italy is currently a lot higher than for example in the Netherlands. However, the problem is that there was so far a certain level of discretion for example in in the classification of level three assets, which can be misapplied, the AQR will investigate these inconsistencies on a selective basis,” he says.

Sandra Crowl, member of the investment committee at Carmignac Gestion, is also positive on the improved transparency of the eurozone banking system that will result from the AQR.

“The banking industry as a whole has raised €48bn worth of capita. The banks have already prepared their balance sheets, with Tier 1 raised already. We expect very good results for investors owning fixed income and we expect improving corporate bond holder returns,” she says. Asked whether the AQR results are likely to influence Carmignac’s weighting to financials, Crowl explains that as of now the company holds 12% of its average client portfolio in financial bonds and a harmonised regulation will only lead towards more positive reaction and yield reduction in the convertible bond market.

“However,” she says, “growth is again down to zero. We have very flat interest rates which could also not lead to a very positive economic environment. At present, for instance, we no longer hold Italian banks’ assets anymore.”

Recently addressing the issue at the InvestmentEurope Pan-European Fund Selector Summit in Hamburg, Polar Capital manager John Yakas – who manages the provider’s Asian Financials and Financial Opportunities funds, and is co-manager on the Global Financials Trust plc – suggested that there could be an impact from the AQR depending on the findings.

He also pointed to the refinancing of financial institutions that has taken place across the region, and that this makes valuations across the sector look much better than some years back.

However, Yakas also agreed that investors are mindful of the outcome of previous efforts by regulators to assess the strength of banks to withstand financial crises. Investors will want to feel confident that the latest assessment provides a sufficiently robust and transparent response.

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