Investors are overlooking the financial sector in Europe, and failing to grasp opportunities for growth present in the currently undervalued European market, according to Adrian Darley, head of European equities at Ignis Asset Management.

A number of banks are attractive right now, most of those which needed capital raised it last year and are now looking for growth; with strong results the companies' share prices are rising but their valuations remain attractive, which is at odds with the investors' underweight positioning of the sector, said Mr Darley, who oversees £1.2 billion ($1.8 billion) of European equities at Ignis.

Santander and BNP Paribas, according to Mr Darley, are attractive at current valuations. Santander, which is trading on 8 times its 2011 earnings and 7 times its 2012 earnings, offers exposure to high growth markets in Latin America and has secured a strong market position in the UK, as evidenced by its deals for Abbey National and Alliance & Leicester assets, he said. 

For 2009 the Spanish bank reported that its non-performing loan ratio was 3.24 per cent and the coverage rate was 75 per cent. Growth in the non-performing loan ratio slowed down for a third consecutive quarter and the coverage rate increased for a second consecutive quarter, following steady reductions since 2006, according to figures posted on its website.

BNP Paribas, meanwhile, expects bad loan provisions to begin falling this year, having reported a net profit almost double that of 2008, helped by last year’s acquisition of Fortis Bank and cost controls, as reported by the Financial Times.

“BNP is also trading on 8 times consensus 2011 earnings but its return on equity will be in the mid- to high- teens, which is being driven by strong earnings growth and synergies from the Fortis deal. BNP’s bad loan provision has peaked and it is paying a high dividend – yet it is trading around book value. That’s a great investment opportunity," said Mr Darley.

He does however caution against institutions that have not weathered the financial crisis as well, such as Commerzbank, which he says has raised insufficient capital and has a large bad loan book.

According to Mr Darley, other attractive financial stocks include insurers Munich Re and Allianz, and Swiss wealth manager Julius Baer, which he sees as offering a good structural play on wealth management with a clear strategy for growth in Asia and the Middle East.

“Wealth managers generally have no exposure to non-performing loans and they have a key growth driver in globalisation. Julius Baer has significant excess capital yet trades on a 2011 PE of less than 12x despite strong growth prospects," he said.