European banks are a good investment as the ECB prepares to lift rates, strategist says
- According to one investment officer, even if the ECB only lifts rates marginally, this would improve the profits of European banks, increasing the returns that investors make by holding stocks.
- Nolting also said that apart from upcoming rate hikes, he still sees upside in bank earnings.
Investor sentiment towards European banks could be about to change, an investment officer told CNBC on Wednesday.
The sector was dumped by many market players in the fallout of the global financial crisis in 2008 and has yet to fully recover to pre-crisis levels. Litigation charges, overbanking and a high level of bad loans are among the biggest problems for Europe's banks — at a time when interest rates have remained low, thus limiting the room to improve their margins.
However, the European Central Bank (ECB) is set to start tightening its monetary policy and increase rates next year amid improved economic fundamentals in the euro zone.
According to one investment officer, even if the ECB only lifts rates marginally, this would improve the profits of European banks, increasing the returns that investors make by holding stocks.
"It is one of our favorite sectors, believe it or not, because we think there's change coming," Christian Nolting, chief investment officer at Deutsche Bank Wealth Management, told CNBC's "Squawk Box Europe."
"The ECB has said that, more or less, it won't do anything or much before the summer of next year. But I think there's a lot of discounting and if at one point in time, even if it's next year, the negative deposit rates are lifted, say at least a little bit, not to positive but at least a little bit, it's a signal for investors probably to put more money in."
ECB President Mario Draghi said in June that it is unlikely to increase interest rates before summer 2019. At the moment, the ECB's interest rate on its main refinancing operations, its marginal lending facility and the deposit facility stand at zero, 0.25 and -0.40 percent respectively.
The central bank was forced to lower rates in the wake of sluggish growth in the region in the wake of the sovereign debt crisis.
Nolting also said that apart from upcoming rate hikes, he still sees upside in bank earnings. "We do see earnings moving up actually," he said.
The latest and ongoing reporting season has brought some good news for European banks. UBS announced last week a net profit of 1.28 billion Swiss francs ($1.29 billion) in the second quarter, a 9 percent increase from a year ago. Credit Suisse beat expectations with second-quarter net income of $655 million.
And the troubled Deutsche Bank surprised markets by reporting a net profit of 401 million euros ($468 million) for the second quarter of the year — much higher than initial forecasts, even though it was down 14 percent on the year.