Most fund managers and investors will tell you that banks are ‘un-investible’ but Citywire A-rated Hans Ulrich Jost is buying into Europe's beaten-up sector.
Speaking to Citywire Switzerland's sister website Citywire Selector, Jost, who currently has 44.2% of the Julius Baer EF Euroland Value fund allocated to financials, said banks are completely wrongly priced.
'Banks are poorly priced, so we have been increasing our weight in banks since February. We went to 24% in February and that’s when we really started to buy them with the collapse of value stocks.
'Then Brexit happened and, following this, we upped our position to 33%. The last time we saw that number was in September 2011, in the trough of the euroland crisis, and in March 2009, which was post-Lehman crisis.'
Jost said he alternates between investment banks and retail banks. Other than Deutsche Bank, where he holds 4.94% of the fund, Jost said he is focused on the retail banking sector.
'Retail banking is the daily bread and butter, they are highly visible businesses unless you have NPL (non-profit loan) cycles.
'Structurally, banks down the road will be trading at comfortable premium to book value again. Because not only does the market not price banks to what they now produce and generate, but it flatly ignores that retail banks will become highly visible.'
Recently Harris Associates’ David Herro said , however Jost believes the bank is on the up.
'Deutsche Bank is trying to get back on its feet, throughout the past few years it has been able to generate an operation profit of some €4 billion. You never saw any of this because of division and litigation charges in 2015 which wiped out €12 billion.
'Investment banks are simple to understand, they are huge scalable businesses. Deutsche has only half the ROE of Goldman Sachs for example, because of its inefficient legacy IT systems, which it’s currently in the process of getting rid of.'
Jost said it will take around two years for Deutsche Bank to get back to where it needs to be, a process which will involve slashing bonuses while keeping the business afloat.
'What we have to be reminded of is the non-core operating unit, which cost the bank €1 billion in 2016. By the end of 2017 the last €10 billion of risk-weighted assets will be gone and we’ll suddenly see €1 billion more profit at the bottom line.
'It has a nice swing factor, but the fact is I’m currently focusing on how many provisions the bank needs to take from unwinding its last €10 billion RWA of toxic assets in its NCOU.’
Jost is rated for his combined performance on the Euroland Value and the concentrated Euroland Value Focus fund, which is a concentrated version of the longer-runnng strategy.
The Julius Baer EF Euroland Value fund returned 20.60% in euro terms over the three years to the end of December 2016. This compares with a 22.26% rise by its Citywire-assigned benchmark, the MSCI EMU TR EUR, over the same time period.