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 about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Michael Peroy

    Can anyone explain these please:

  • Mountaineer

    PTBV – Price/Tangible Book Value
    RoTE – Return on Tangible Equity
    P/PPP – Price/Pre-Provision Profit
    HOLT is a Credit Suisse advisory service, not a valuation metric.

    Hope that helps.

  • http://www.pragcap.com TPC

    price/pre-provisioning profits, price to book, return on tangible equity, HOLT is the Credit Suisse HOLT chart score.

  • http://www.pragcap.com TPC

    Beat me to it. Thanks Mteer.

  • Mountaineer

    Glad to help. I figured I would pitch in since you’re probably too busy expanding the short book at the moment to track comments :)

  • http://www.pragcap.com TPC

    I am not short equities into this thankfully. I’ve actually been looking for a spot to get long, but this market is awfully choppy. My indicators are looking moderately positive here for trading, but this sort of volatility makes it damn near impossible to trade. Macro is difficult right now.

  • Willy2

    Is TPC not short the 30 year bond ?

  • Willy2

    I have more confidence in the vision of the RBS:

  • Mountaineer

    Macro is always difficult. You’re on of the few I’ve seen who seem to dance in the rain without getting wet. To paraphrase Klarman I’m more of a lowly value guy, just a patient investor with a calculator and a contrarian streak. However, I’m gonna go ahead and help you out on your macro view, just for the hell of it. You must have missed it earlier, but apparently this mornings ISM (you know, the one where the backward indicators all looked fine but those pesky forward indicators…well…not so much) has officially put an end to any speculation concerning a further weakening in the economy. Furthermore, today’s bounce (you know, the one off oversold indicators and important technical levels on continually low volume) has also confirmed that any potential risk of a further decline in the markets is now also off the table. Trade accordingly. You’re welcome.

  • Nils

    Don’t know what to think of it. Maybe this analysis is really just banks scratching each others backs?

  • Michael Peroy

    Thanks Mountaineer, much appreciated.

  • harold hecuba

    lol this firm is relentless. this is what passes for soemone who needs assets under management nothing more nothing less. how about 25 reasons to sell banks and why they are all zombies. party on

  • Mountaineer

    No problem Michael.

  • Willy2

    Banks use Treasuries/Gilts/Bunds as a collateral when (if ??) they borrow from each other. So, when the value of those bonds are going down the drain then the banks have much less room to lend to each other. And then both the RBS and Credit Suisse are toast as well.

  • Willy2

    Correction: I don’t agree with the RBS anymore because I think that in the coming weeks/months yields on the long end WILL go up and yield on the short end of the curve WILL go down.

  • goodfriend

    “Yield curve will steepen. We do not expect a big negative surprise from US housing”

    Disagree on both, i’m not deflationist but disagree…bond vigilantes in europe will keep provisions high for those european banks in regards with certain countries exposure which were unveiled during greek crisis. Austerity measures will impact them too. When will ECB restrained it collateral rules (it has extended them down to to invst grade copr bonds) ?