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.”