Alister Hibbert, fund manager or the BlackRock European Dynamic Fund, believes there is great promise in the banking sector.

It is becoming clear that investors’ expectations at the end of last year were perhaps too pessimistic. Balance sheet risk looks as if it has peaked and is now falling, first-quarter earnings were much better than expected, and banks are now far more confident about future revenues – which is why banks in the US now feel financially secure enough to repay the TARP money to the government.

We are at an earlier stage in the cycle in Europe, but signs still look encouraging. Profits are higher than expected and default rates are nowhere near the levels predicted at the height of the gloom last year.

In the most favourable scenarios, many banks could double or treble their earnings over the next few years. Although risks attached to the banking sector remain high – meaning that several different scenarios are possible in most cases – we believe that the risk of the worst-case scenarios has diminished significantly over the year to date, and the likelihood of the more favourable scenarios occurring has risen accordingly.

This could be one of the best buying opportunities investors will ever see – great businesses which have been punished by the market and have fallen up to 90 per cent from peak value. Many financials may well be trading at three, four or five times 2011 earnings. We’ve already seen a rally in financial stocks, but a return to previous lows is very unlikely – we believe the time to get into the market is now.

We have significantly increased our holding in financials as balance sheet risk in the financial sector is falling. We were overweight in defensive stocks but we are now underweight there after moving a quarter of the portfolio into financial and industrial stocks. We are looking for recoverable equity value and there is a lot of this in the current markets. We believe we have seen the bottom of a bear market and there are some uniquely compelling opportunities.

Further reading:

Gartmore finds 'gems' in adverse sectors
Investors snap-up cut price shares