Leeman overweights 'mispriced' European banks in $1bn fund

Morgan Stanley’s head of European equities Matthew Leeman has moved overweight banks in the region in the view there are mispriced opportunities in the sector.

Leeman, who manages the $1.4bn European Equity Alpha fund, said the market correction compressed valuations across the board and unjustifiably dented a number of bank share prices.

In moves begun during last summer's sell-off, Leeman has boosted exposure to financials including BNP Paribas and HSBC in the view both offer low P/E ratios and are set to perform well on a long-term view.

"I think Basel III should be viewed as a positive from an investment perspective. The increased bank capital ratio requirement does mean lower returns, but the market is clearly not factoring in that it will also result in lower risk," said Leeman.

The manager added the increase in capital will allow European banks to lend more profitably, due to a lower hurdle rate.

"If you look at the measures which have been put in place, the LTRO programme has been underestimated as it goes an awful long way to moving away from the funding regime for banks, through increasing the collateral allowance.

"The LTRO programme will deleverage the banks in a planned way as opposed to a fire sale of assets."

Leeman added he cannot envisage European banking returns on equity moving back to pre-Lehman levels, but believes they will come out of this crisis and produce consistent returns.

"Banking return on equity has typically been around 15% and although the returns will be below what they used to achieve - investors will just have to accept it.

"A number of European banks are mispriced and undervalued from a long-term perspective, but banks in Spain and Italy, for example, do not offer any value from a fundamental perspective."