In sign of optimism, U.S. funds add to European bank holdings

By Ross Kerber

BOSTON (Reuters) - More U.S. fund managers are buying into Europe's previously unloved banking sector.

With profits set to rise amid restructurings and the European Central Bank's quantitative easing program kicking in, banking stocks have become more popular with U.S. international fund managers who bet the institutions will prosper as the region's economy improves.

This year, almost every top European bank has picked up investments from U.S. international funds, according to the most recent data available from Thomson Reuters' Lipper unit. That is despite high-profile challenges facing top names such as Credit Suisse Groupand Deutsche Bank AG, both of which plan reforms and will report results later this month.

"Everybody hated these companies; they were considered pariahs. But the valuations are attractive and they're doing a lot of things right" such as cutting costs and improving capital ratios, said Marc Halperin, manager of the $2.4 billion Federated International Leaders Fund.

Halperin's fund has added to positions in France's BNP Paribas SA, Credit Suisse and Italy's UniCredit SpA - its three top holdings as of Aug 31, its most recent monthly report.

Halperin and others, such as Simon Webber, a portfolio manager on the $20.1 billion Vanguard International Growth Fund, and David Samra, manager of the $10.9 billion Artisan International Value fund, say one reason to buy the European stocks is because they are right-priced. Deutsche Bank, for example, trades at 0.5 times its book value.

"With that valuation, there's a lot of scope for things to go well," Webber said.

Samra said European banks could also be in a position to boost dividends or buybacks. Either could be easier if Europe meets expectations of growth of close to 2 percent annually.

Third-quarter earnings announcements from U.S. banks get under way this week. European banks, which have outpaced the U.S. banks, will follow later this month. STOXX Europe 600 Banks index has gained 3 percent since January, while the KBW Bank Index, which covers U.S. banks, is down 5 percent over the same period. Analysts worry U.S. banks may fall short on areas such as trading revenue, and that the Federal Reserve may delay rate increases that help results.

WINNING IN ITALYTo be sure managers could be disappointed if the European banks do not deliver improvements or if the reforms planned by new leaders backfire and reduce profits.

And, value-shoppers may have missed their window on some stocks. Italy's Intesa Sanpaolo SpA is already up around 30 percent this year, and was a big contributor to the Oakmark International Fund, manager David Herro wrote in a recent investor note.

"People are starting to see that, although the pricing is not as attractive, the economic environment is more attractive," Herro said.

(Reporting by Ross Kerber in Boston. Additional reporting by Steve Slater in London; Editing by Richard Valdmanis, Linda Stern)

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