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European bank stocks could see 35% rally

European banking stocks could see a 35 percent rise this year backed by attractive valuations, according to the CEO at TCMG Asset Management, as the European banking sector rallied on Monday to highs not seen since April 2011.

A sharp improvement in credit quality, progress on a banking union and improving backdrop in terms of loan growth and mergers and acquisitions make European bank a good investment, Beat Wittmann told CNBC.

"(It is) Important that the (banking) system integrity is preserved, that there is a global recovery. Interest rates are really low, and valuations…have been extremely distressed and they are very low still in European banks," he said.

(Read more: Europe's banking marriage needs 'hard work': Trichet)

Wittmann added that these factors, along with a "bad news flow", has kept European bank valuations really low – thereby making them an attractive buy.

The view follows the news that over the weekend global regulators have watered down proposals regarding the amount of debt banks are allowed to hold, fearing overly strict rules could curb lending.

Banks were the biggest gainer on the stock exchanges on Monday after the news, which was announced at a meeting of central bankers and regulators in Basel, Switzerland, Sunday.

Dr David James Killock| Flickr Open | Getty Images

Wittmann's call comes amid rapidly improving sentiment towards European banks. U.S. money market funds increased their total exposure to European financial institutions by 11 percent in the first two months of the fourth quarter of 2013, according to ratings agency Moody's.

Many analysts have said that European equities, including its banking sector, will see a big rally this year as the region's growth prospects increased.

"There's a situation where a lot of US equity investors feel market there is toppy. Flows likely to come out of US and into Europe," Mike Ingram, market strategist at BCG Partners told CNBC in a phone interview.

(Read more: Peripheral bonds: How to play Europe's recovery)

He notes that Wittmann's prediction is possible as the European market gains momentum and investors bet on economic recovery, but said there are dangers of "overshoot".

"It is easy to construct a 'eurotation' story into banking sector, but there are some really profound long-term questions. The broader worry as a whole is that Europe didn't fix their banks right at the start," he said.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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