European institutional investors are feeling more optimistic about the outlook for the region’s banks than they have in the past two years, according to a new survey from Fitch Ratings.
The rating agency reports that investors expressed more confidence in a positive outlook for the credit fundamentals of financial institutions than for any other sector. It says that 64% now expect conditions in the sector to improve, up sharply from 42% in the previous survey (conducted back in October). This was also strongest reading since early 2011.
Fitch says this optimism was also reflected in survey participants’ views on the likelihood of voluntary early repayments of the €1 trillion in liquidity provided by the European Central Bank. It found that 42% of investors expect that banks will repay up to half of the total, as healthy firms push to wean themselves off the ECB. Another 44% expect the repayment to be between 10% and 33%. Fitch says it expects up to a third of the funds could be repaid this year.
While repayments so far have come from some of the stronger southern European banks, it notes that others are continuing to use the funds to buy time to deleverage their loan books. “There is still a lot of work to be done in terms of restructuring balance sheets and stabilizing funding structures for the medium term,” it says. “As the uncertain economic outlook could delay this recovery, it makes sense for these banks to hold onto their [cheap] funds.”
The survey also found that banks were also the second most favoured investment choice, chosen by 24% of respondents, Fitch reports.
The survey was conducted between January 4 and 31, and represents the views of managers of an estimated US$7.6 trillion of fixed-income assets.