The US financial sector still provides an attractive opportunity and should not be declared as "un-investable" because of negative market sentiment, says Western Asset, a subsidiary of Legg Mason.

Investors should not give up on the US financial sector, despite low interest rates, legal and regulatory pressures and European contagion fears, said Ryan Brist, head of US investment grade credit.

Western Asset’s grounds for optimism in bank equities and fixed income securities derives from the fact that US banks have nearly doubled the amount of tangible equity on their balance sheets over the last two years, and have reduced their reliance on the commercial paper market for funding.

The low valuations caused by a lack of market confidence provide an opportunity for investors to boost their weightings in US bank stocks, the firm says, although Brist cautions it may take time for the position to bear fruit.

Brist admits there is “no immediate positive catalysts on the horizon,” but he believes investors have been focusing on negative details and disregarded what he believes are the solid, longer-term fundamentals. However, Brist is still concerned about the near-term volatility, with the next three to six months expected to be a bumpy ride. “In the longer term we do not expect loss of principal on fixed-income securities of the major financial institutions,” he adds.

“A move to overweight US banks may not be rewarded immediately but we believe that longer-term balance-sheet fundamentals will ultimately be reflected in spreads,” he said. “Investors are still ignoring the improvements made to bank balance sheets across the globe but they should remember this is about investing for the coupons of the future, not the past.”

Speaking about the recent US bank rating downgrades he said: “We believe that balance sheet fundamentals do not correspond to the underlying ratings trajectory. Large-cap US banks have made undeniable progress in funding, capital adequacy and asset quality. Credit worthiness has improved substantially. But we don’t expect good news anytime soon on the ratings front. The recent downgrade of Bank of America is just another example of Moody’s overcompensating for its mistake of overrating the sector.”