European Banks Haven't Been This Cheap Since 80s
European banks have faced their fair share of bearish sentiment plagued by the region's debt crisis in recent years, but one portfolio manager says now is time to invest in these beleaguered stocks, which haven't been this cheap in 30 years.
Daniel Hemmant, senior portfolio manager for European equities at BNP Paribas Investment Partners, said European banks are trading at price to book ratio of 0.8, a level that hasn't been seen since 1983-84.
"The average since 1995 is 1.87 [times price to book], but obviously that was probably a period of elevated returns and higher leverage," Hemmant told CNBC. "The negative slump on it would be that banks are going back to what they used to be and the last 20 years has been an anomaly."
While there are still a lot of tail risks associated with the sector, Hemmant said banks that have a decent level of pre-provision profit are attractive, because it allows them to write down the bad loans they've made.
"Where they don't have enough pre-provision profit, then that process can take a very long time and obviously a number of the smaller domestic Spanish banks are struggling in that regard, the Italian banks are struggling," Hemmant said. "We tend to like the markets where you're seeing a lot of consolidation - the U.K. would stand out in that regard, and also Spain, certainly for the larger banks."
Hemmant's call comes despite a warning by the European Central Bank on Wednesday that the region's slumping economy had made it more difficult for many borrowers to repay their loans, leading to a surge in problem loans, burdening banks.
(Read More: Risk of Bank Failures Rising in Europe, ECB Warns)
Hemmant, however, argues that European banks are generally priced for the returns they are currently making and you should see provisions normalizing, which could lead to better returns.
"You know the earnings are cyclically depressed and you know the valuations are historically very low," Hemmant said. "Usually the right time to buy cyclical stocks is at the bottom cycle – it's never a comfortable thing to do, but we are somewhere around the bottom of the cycle."
(Read More: Switzerland Still Favorite Banking Hub: Julius Baer)
Rob Aspin, head of equity investment strategy, Standard Chartered Bank, struck a note of caution, saying cheap valuations don't necessarily make European banks a good buy.
"The concern that we have is obviously on tail risks that the banks still have; they still have significant legacy assets on their books, and are still significantly leveraged," Aspin said. "If you compare them with U.S. banks, the U.S. banks have been declining leverage now for quite a few years and are in a far better situation."
— By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu