Europe banks get face-lift, but are far from pretty

Should investors be cautious on banks?
Should investors be cautious on banks?

Major lenders in Europe appear to be finally getting their books in order after a financial crisis that ripped up the rule books on the sector.

Nonetheless, analysts and economists remain unconvinced that banks are truly out of the woods and point to tight regulations, ongoing litigation costs and ultra-low interest rates as key challenges.

European banks forced to cut costs
European banks forced to cut costs

"Definitely the banking sector has been adjusting, has been addressing the weaknesses coming from the crisis. It has been deleveraging, it has been difficult, there are still dealing with a number of challenges and regulatory changes," Thanos Vamvakidis, head of European G10 FX strategy at BofA Merrill Lynch Global Research, told CNBC this week.

Banks in the U.S. were quickly strengthened and recapitalized in the wake of the global financial crash of 2008, but in Europe they floundered amid a sovereign debt crisis that raged across the continent.

Banks are an unappetising investment: CEO
Banks are an unappetising investment: CEO

But the latter half of 2015 has seen a definite change in direction, with shiny new strategy updates being released, severe restructuring and substantial job losses.

The major challenge for European lenders is growing revenues when interest rates are so low. They also have to ensure investment banking operations return more money than their cost of capital. Additionally, banks are seen as being overextended in global regions that are suddenly weakening and many still have to deal with litigation issues following rate-rigging and foreign exchange scandals.

Barclays announced a new CEO this week, who will likely re-focus efforts on investment banking. Credit Suisse raised $6.2 billion in fresh capital through a rights issue and its chief exec, another new appointment, announced plans to scale back the investment banking business in favor of wealth management. Deutsche Bank, meanwhile, announced a raft of job cuts in a heavily anticipated strategy update.

Jes Staley
Barclays appoints Jes Staley as new CEO

Michael Bell, global market strategist at J.P. Morgan Asset Management, is positive on the sector from an equity investment point of view.

"I think fundamentally banks are cyclical stocks and we're quite positive for the outlook on the European economy and the unemployment rate is going to fall," he told CNBC Thursday.

Bell said that banking stocks "probably look quite attractive" on a medium-term view but warned that realistically the sector would never provide the return for investors that they did before the crisis. There were similar concerns from Jim McCaughan, CEO of Principal Global Investors.

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"Long term banks are a pretty unappetizing investment because they are so heavily regulated. They are going to be so heavily regulated it will be very hard for them to get anywhere like the past returns on equity," he told, CNBC Thursday.

To perhaps underline the point, Andreas Dombret, the executive board member of Germany's Bundesbank, spoke this week of the regulation that still needs to be implemented on the bank system in Europe. In a speech in London on Thursday, entitled "Shaken but not stirred?," he said that completing further reforms would be a "demanding task for markets and supervisors alike," adding that there was no viable alternative.

The Euro Stoxx 600 sector index for banks hit a four-year high in July this year, but has since fallen 15 percent.

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