The potential for bank earnings to rise in coming quarters means that it is time to reconsider the sector, says Huw van Steenis, banking analyst at Morgan Stanley.

“Many of the better banks can earn their way through the crisis, although we still think many weak banks will need help,” he says.

“Our core thesis is that profits will be boosted by strong markets activity and earnings from steep curves, better margins and, in some cases, higher market share.”

Mr van Steenis says that there is still huge overcapacity in almost every industry except banking, where a major repricing has taken place. “Rights issues this year are paying around 50 per cent higher fees per dollar raised than 12 months ago. To conduct an FX trade costs twice as much as it did a year ago.”

Very low interest rates, he says, are driving yield-hungry investors to assets such as corporate bonds. That alleviates pressure on banks, which had feared they would have to put capital aside to help big companies.

Steep yield curves will also help banks make their way through the headwinds, Mr van Steenis says.

Funding safety nets and central bank schemes are allowing banks to make money, although it is unclear what will happen when these are withdrawn.

“We think a rotation to banks that can benefit from better wholesale earnings and steep curves is likely, and we would use any market weakness to reposition portfolios.”

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