Pragmatic Capitalism

Practical Views on Money & Finance


Credit Suisse upgraded the European banking sector citing 8 reasons why the banks now look attractive.

The reasons for the upgrade to European banks are:

  • Macro risks are overstated.
  • No hard landing: European and global PMIs are consistent with 2.5% and 3.5% GDP growth, respectively.  Credit: Speculative grade spreads lead charge-offs and defaults by 6 months and are consistent with a further fall in charge-offs. Credit spreads have not widened in the last month, in spite of the macro worries priced into the bond market.
  • Tight fiscal/loose monetary. The combination of tight fiscal and loose monetary policy is beneficial for banks versus cyclicals (as it allows lower rates for longer and underpins sovereign credit quality).
  • Yield curve will steepen. We do not expect a big negative surprise from US housing.
  • Valuation and profitability are supportive. European banks trade on a 10% discount to historical norms on P/PPP, even on pessimistic charge-off and deleveraging assumptions. A PTBV of 1.1x is discounting a RoTE of 11%, but our banks team expects 14%, and possibly 17%, by 2012. Banks are the cheapest cyclical sectors on HOLT, given our assumptions.
  • Pre-provisioning profits normally rise to be 16% above previous peak in the three years after a banking crisis – and this time is not different. Our banks team highlight that assets spreads are widening.
  • Lending conditions suggest loan growth will shortly turn positive in Europe.
  • Regulation and tax have been watered down: our banks team estimates that the likely hit from BIS 3 has fallen from 37% of net earnings to 9%.

How to play it?  Although banks are still their largest underweight among all sectors CS still likes the following names:

“Our preferred banks are BNP, Commerzbank, Lloyds, SAN, HSBC, Uncredit, Sberbank.”

Source: CS

Got a comment or question? Feel free to contact Cullen via email here or on Twitter here.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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