Markets Underestimate ECB's Effect on Banks: Pro

Investors underestimate just how positive an effect the European Central Bank's move to flush the market with liquidity has had on banks in Europe, Huw van Steenis, head of European, Middle Eastern and African banks and financials research at Morgan Stanley, told CNBC on Thursday.

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Fears of knock-on effects from the euro zone's debt crisis have squeezed inter-bank lending, but since the ECB launched a long-term refinancing operation (LTRO) in December, things have slowly started to return to normal, according to various analysts.

The ECB will launch a second LTRO, in which it will lend banks unlimited amounts for three years at its record low interest rate at the end of next month.

"I think the market is underestimating quite how important the ECB 's infusion of liquidity is to the banking system," van Steenis said in an interview at the World Economic Forum in Davos.

"For me it means that no major bank will go bust in the next three years now, and I think taking that risk off the table enormously helps investors and banks' management interact with each other," he said.

Investors could get back into European bank stocks, with some of them trading "well below book value," van Steenis said.

"Things are far from perfect. We have years and years of adjustment still to take place. We are arguing European banks may shrink their balance sheets by 2.5 trillion [euros] ($3.3 trillion) over the next four years, but I think the imminent crisis is receding and therefore investors can get back in the water," the Morgan Stanley

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Currently, deposits at the ECB are made chiefly by northern European banks, which are worried about the crisis, while loans from the central bank are taken by the southern banks, whose economies are supported by this liquidity. Without it, "there would be an enormous credit crunch" in the area, van Steenis explained.

"For the northern Europeans, they need to feel comfortable again…and I believe over the course of this year we'll start to see that coming through," he said.

He gave the example of bank bond issuance this year, which took off compared with the previous year.

"In 14 days that's more that we've seen in the whole of the last six months and the last year. So I think investors are starting to come back in, but they need to see the broader picture as well to be fully invested," van Steenis said.

"I saw 15 CEOs of banks yesterday and they're convinced that this liquidity is very important," he added.

But despite the fact that banks' CEOs are optimistic, businesspeople are cautious about the banks' ability to lend, and it will take between three and five years for that attitude to fade, according to van Steenis.  

However, banking stocks are unlikely to return to the lows they hit at the height of the crisis, even though now the problem of Greece is looming over markets, he said . He added that Greece's sovereign debt will need to be restructured in a way  that doesn't affect other countries.

"I think it's much less likely now that we'll go back to those lows," van Steenis said.