And, commentators seem positive that, barring much more negative results than currently expected, the results of could lead not only to a rerating of European bank stocks, but the beginnings of a turnaround in European growth.
Previous versions of such tests proved to be less rigorous than initially thought, with a number of banks that passed the country-led iterations in previous years having to be bailed out fairly soon after achieving a pass mark. But, with the ECB in the driving seat this time around, consensus about the efficacy of these reviews seems to be a little more optimistic.
As James Sym of Schroder’s pan-European equity team points out, if it is to be something to which the markets are able to attach value, it needs to be credible. And, in order for that to happen, some banks need to fail. But, what he doesn’t envision is a failure of the entire sector.
Alastair McCaig, market analyst at IG agreed and said: “The market consensus appears to indicate that around eleven banks look set to fail but crucially none of the biggest names are expected to be on that list.”
He added that, should banks fail to meet the required levels of capital, they will have two weeks to produce a plan to tackle the problem.
“Raising new capital will be a requirement for some but it is not expected to be in the same scale that we have previously seen,” he said.
According to David Moss manager of the F&C European Equity Fund, at worst bank capital will need strengthening, which he points out, has been a fact of life that European investors have already been living with in recent years.
“At best a hurdle to banks increasing their lending activities will be removed and the green shoots of easing credit demand will translate into meaningful demand in the real economy, reversing a trend towards lower confidence levels in the last few months,” he said.
But cautioned: “We don’t know if growth will come back to Europe in the fourth quarter, in 2015, 2016 or beyond. Valuations, however, suggest that on a long term basis little growth is priced in and cash returns should compensate adequately while investors wait for growth to materialise. The breadth and depth of European markets also provides an opportunity to benefit from divergent trends, regardless of the prevailing macroeconomic environment.”
According to Sym, both of his funds are positioned for an EU recovery. “Markets hate uncertainty. What you have ahead of the results of the AQR is a classic wall of worry, which should improve once the results are out.
At a bank specific level, both McCaig and FundCalibre managing director, Darius McDermott are positive on banking stocks.
According to McCaig: "Those that get the seal of approval from the ECB could see fresh investor inflows, while those that have been bearish on the sector might be forced to reassess their views."
“I don't think it is implausible for a credible test to lead to a re-rating of the banking sector,” McDermott added, “This, coupled with the potential for increased lending, which may spur growth, and the ECB adopting QE further down the line, make European equities, and banks in particular, an interesting place for a value investor to be.
M&A
The successful conclusion of the AQR could also result in an increase in M&A within space.
According to Guy de Blonay, lead manager of the Jupiter Financial Opportunities Fund, while there remains limited scope for M&A among the larger banking names, there is a possibility that the number of “bolt-on” acquisitions could increase.
“A great deal of the M&A activity we are seeing is in fact taking place on a much smaller scale. In Italy especially we think there is a plethora of regional banks, small and mid-cap organisations ripe for consolidation,” he said in a recent note.
“We believe that a key catalyst for this consolidation will be the publication of the results of the ECB’s Asset Quality Review.”