0604 GMT October 23, 2018
Eurozone banks are the worst performing stocks so far this year, down 13 percent as investors shed assets seen as most vulnerable to political upheaval, Reuters wrote.
At the same time, a boost for the sector in the form of an interest rate hike by the European Central Bank (ECB) still seems far away.
Yet banks have generally delivered strong second-quarter results, and their low valuations and growing dividend payouts are attracting investors despite the political uncertainty over, for example, Italy's new government and US trade policy.
Banking shares have still not recovered from the financial crisis: the eurozone bank stocks index is down 75 percent from its 2007 peak, while the broader eurozone stocks index is just 10 percent away.
So there is still a long way to go. But that is precisely what is attracting value investors keen to find a bargain before the rest of the market catches on.
"We have been adding to European banks particularly as we've seen US banks get closer to fair value whereas there's a big disparity in valuations in Europe," said Chris Dyer, head of global equity at investment manager Eaton Vance.
Eurozone bank stocks trade at 0.7 times their book value per share (BPS), half that of the US S&P 500 banks sector.
And banks' earnings overall have comforted investors.
Some 74 percent of financial sector firms have beaten earnings forecasts this quarterly reporting season, one of the strongest ratios in Europe, Thomson Reuters data showed.
Profitability is up 22 percent year-on-year, Goldman Sachs analysts said, while credit quality is rising along with loan volumes, despite slowing economic growth in the eurozone.
The bank recommends buying the shares of France's BNP Paribas, Italy's Unicredit and Spain's Sabadell.
"Valuations are saying people don't have a lot of confidence in European economic growth and have lost patience with the idea that rates will ever go up," said Steve Sherman, senior portfolio manager at BNP Paribas Asset Management (BNPPAM).
But bank stock buyers say they're being paid to wait. The sector offers good dividend yields, with even Britain's state-owned RBS resuming dividend payouts after 10 years.
"We see a 15 percent upside in the next 12 months for the banking stocks we cover, against an 8.8 percent upside for our broader European coverage," said Farhad Moshiri, an analyst covering the sector at researchers Alphavalue.
Perceived ‘value’ stocks such as banks are coming back into vogue as sharp falls in tech giants Facebook and Twitter dent confidence in strong-earning ‘growth’ stocks.
But even if this marks a turning point in the decade-long dominance of growth over value stocks, risks remain.