RPT-U.S. investors: no rally on Euro bank stress tests

* Investors do not see big bank stock rally post-test

* Bank valuations not cheap enough

* Nonstandard approach a concern for banks

By Daniel Bases

NEW YORK, July 21 (BestGrowthStock) – U.S.-based investors and
analysts may welcome Europe’s banking sector stress tests to
help remove doubts about the fragile sector, but they do not
expect a sustained European stock market rally to result.

Scepticism surrounds the operation, fund managers and
analysts say, citing differences between what the European
Union is expected to publish and what the United States
revealed in its own tests in May 2009.

“The banks in Europe are still kind of in denial by what’s
happening. There has been little write-downs and deleveraging.
There’s not been a lot of capital raising whereas all of that
is behind the U.S. banks,” said Philippe Brugere-Trelat,
portfolio manager of the $1.8 billion Franklin Mutual European
Fund (MEURX.O: ).

Starting on Friday at 1700 Central European Time — after
Europe’s markets close — tests on 91 euro-zone banking
institutions are due to be published.

In the U.S. tests, which at the time also came under
criticism for being too easy, banks requiring extra capital
under a severe conditions scenario were publicly identified, as
was the estimated amount needed to be raised.

The U.S. tests, regardless of whether they were considered
as severe as necessary, are widely considered to have helped
start build investor confidence in the sector. Since May 2009,
the S&P Financial index (.GSPF: ) is up over 12 percent, although
it is down 2.6 percent year-to-date.

Fund managers cite a lack of transparency in Europe’s
efforts, and the perception that there is no one single set of
standards by which the banks will be judged across the European
Union’s 27 members.

But the main sentiment expressed is that something is
better than nothing.

“I think there might be a brief rally but you don’t have
the benefit of all the other factors that were in place in the
U.S. when the results of the stress tests were announced,” said
Thomas Angers, investment analyst covering international
finance at Philadelphia International Advisors.

Those factors included quantitative easing measures by the
U.S. Federal Reserve, and fiscal stimulus, Angers said. Now,
just as the test results are due, Europe is on an austerity
kick which threatens to choke off growth in an already fragile
economic recovery.

Since the start of this year, the STOXX Europe 600 banking
index (.SX7P: ) is down 12.7 percent, even with a nearly 6
percent rally in the last three weeks.

“From a European bank perspective, some of the multiples
look cheap on the face of it, but from the buy side there is an
underlying lack of trust in some of the numbers out there,”
said Frank Crown, institutional portfolio manager for Invesco
International Equities.

BIFURCATION

Separating the winners from the losers may be an inexact
science in these tests. However a consensus appears to have
formed that the biggest troubles lie with the savings banks in
Spain and Germany as well as with the Greek banks.

“The real problems are in the non-listed banks in Europe,”
said Franklin’s Brugere-Trelat, who has banks underweight in
his portfolio but still owns Barclays (BARC.L: ), BNP Paribas
Banca Intesa (ISP.MI: ) and UBS (UBSN.VX: ), calling their current
valuations cheap.

“From an investment point of view, from a stock market
point of view, I think that banks that matter will pass and I
think that will help the counterparty/interbank lending
issues,” Brugere-Trelat said.

In Spain, the government is forcing mergers of its cajas to
build stronger institutions. Germany landesbanks are also on
the firing line, despite the president of the country’s
association of public banks saying there is no indication they
will fail the stress test.

“They (cajas and landesbanks) seem to be the ones short of
capital relative to the publicly traded companies,” said
Invesco’s Crown.

Credit Suisse estimates Europe’s banks will need some 90
billion euros in capital. In addition, European banks need to
refinance an estimated 3.3 trillion euros of senior wholesale
funding, of which almost half is due in 2010-2012, according to
Morgan Stanley estimates.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^For more on the stress tests: [ID:nLDE66K0YO]
For commentary from BreakingViews [ID:nLDE66K0IV]
Top 15 banks metrics comparison: http://r.reuters.com/nyb97m
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(Editing by Eric Walsh)

RPT-U.S. investors: no rally on Euro bank stress tests