LONDON Investors burned by tumbling share prices and emergency cash calls say they could be forced to quit European banks for good unless policymakers forge ahead with a banking union in 2013.
Lamenting piecemeal progress to make euro zone members jointly responsible for all lenders, speakers at the Reuters Global Investment Outlook 2013 Summit in London this week said governments had to work faster to restore investor faith in banks or face years of anemic economic growth.
"We have dealt with an enormous number of economic hurdles. We have started to build a new governance structure. But we need a banking union - otherwise we are going nowhere," said Franz Wenzel, head of investment strategy at AXA Investment Managers.
Euro zone finance ministers gave their blessing to the controversial union during a tense summit in June but several countries have since backpedalled on the level of support they would be willing to offer non-domestic banks in troubled times.
This U-turn, together with tight new rules on how banks must organize their balance sheets and make money, has crushed confidence in banks' ability to generate attractive, risk-adjusted returns for investors.
After shunning bank stocks for years, investors say they see few reasons to return to the sector.
"What we need is political and regulatory certainty around the banking sector. A proper fundamental analysis of what a bank will be worth 5-10 years going forward can only be done when this is all bedded down," Andreas Utermann, chief investment officer at Allianz Global Investors, said.
European bank valuations have collapsed in the years since the bankruptcy of Lehman Brothers, with stocks typically trading at around 0.7 times book value compared with a substantial premium in bull markets.
But most banks are still not cheap enough to tempt asset managers back.
"There will come a time when banks are too cheap but this is not the case today ... It will be another five years before this plays out. You can have an exposure but it's very country specific. It is not a major investment theme for us, it's just too early."
Rod Paris, head of investment at Standard Life Investments, said shareholders and bond buyers no longer had a clear idea of what a sustainable banking business model looked like, making it almost impossible to bet which lenders would survive the crisis.
"Banks need to raise quite a lot of capital from somewhere and unless they can articulate a sustainable business model, the price of raising that capital will be very high and that will clearly cause a problem," Paris said.
"We've seen people like UBS recently restructure to give that sense of transparency to investors and I think their share price was largely rewarded by that move."
Speakers blamed Europe's busy election schedule and next September's German vote in particular, for the delays in tackling controversial issues like the European Central Bank's role as lender of last resort, fiscal harmonization and the banking union.
But policymakers no longer have the luxury of time if they want to keep the region's feeble economic growth on track.
"These were the three conditions that investors said needed to be fulfilled to put the EMU back on a more sustainable path. Capital markets have given European policymakers a breather to sort out their issues, but they need to use it," Utermann said.
If pension funds and insurers felt the full support of the European Union behind cash-strapped banks, share prices would likely rally in the same way as peripheral European sovereign bonds responded to the ECB's pledge to buy the bonds of struggling euro zone states that seek help, investors argued.
With a broader, more supportive investor base, banks could regain the confidence to step up lending activities, reducing the risk that Europe's recovering economies could be starved of credit as deleveraging continues.
Ewen Cameron Watt, chief investment strategist at BlackRock Investment Institute, rejected the idea that cash-rich fund managers who didn't want to support banks with equity could step in to fill a vacuum as lenders themselves.
"We can't do it if our clients do not want us to do it. We are a fiduciary, the model has changed, and fiduciary models do not invest their own capital, they invest capital on behalf of people along a particular set of risks," he said.
The faster banks increase lending, the faster state aid could be paid back, the speakers said, trimming national debt and freeing taxpayers from the threat of permanent ownership of their national banking champions.
By the end of 2013, AXA's Wenzel said investors needed clarity on the tools and responsibilities of the ECB, the roles of the national regulators, agreement on how to deal with failing banks and a comprehensive list of systemically important lenders.
"That needs to be clarified and agreed upon because I sense that various national interests will be defended with teeth and claws," he said.
Without this kind of clear progress, European banks will struggle to meet rising regulatory demands on capital, a scenario that would jeopardize their futures but also the future of the entire euro project.
"If this (banking union plan) does not get traction, a lot of our clients in Asia, the Middle East and the U.S. will revert to doubts about the future of the euro. In that sense, it is critical," Wenzel said.
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(Editing by Susan Fenton)