Davos WEF
Davos WEF

Peak bank regulation is behind us, says Schroders’ strategist

Banking regulation burdens will ease in 2017: Schroders

The ramp-up period for banking regulation is now behind us which will support U.S. bank stocks further, Schroders' global head of strategy told CNBC at the World Economic Forum in Davos on Wednesday.

Huw van Steenis flagged this is one of the key reasons, alongside high expectations for the widely anticipated reflation trade, why U.S. bank chiefs have reflected tangible optimism during the annual meet at the Swiss mountain town.

"It's the bump to growth and improvement of interest rates. Interest rate rises could add fifteen to thirty percent to bank stocks earnings in the U.S.," he explained, noting the sector had already rallied 30 percent in recent months.

"There's also enthusiasm that high peak regulation is probably behind us," he continued, adding "it's not going backwards but it's not going to carry on ratcheting so dividends can restart, buybacks can increase and it's that greater confidence that investors can come back and enjoy the benefits of U.S. banks."

Adrian Brown | Bloomberg | Getty Images

Huw's more tempered outlook for their European counterparts stems from his pessimism surrounding the concept of negative interest rates,which still underpin the European banking backdrop.

The strategist highlighted that of the €1.6 trillion ($1.71 trillion) offered by the European Central Bank (ECB) to regional banks, only 5 percent had been taken up by those institutions. He expressed concern that the ECB would remain mired in negative rates until 2019, deterring clients from investing in the region's banks given the "quirky backdrop".

While some select U.S. financials remain among van Steenis's top picks for the year ahead, he is more circumspect with regards to the European banking sector.

"The top end of European banks have been stress tested to withstand huge shocks, have taken on board the message they need to be more efficient and have got on top of their problems," he affirmed.

"The challenge is we've got a very uneven picture where some banks are dealing with issues they should have dealt with years ago. The better end actually have value," van Steenis concluded.

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