European Banks Are Cheap So Investors Should Pile In, Citi Says
2018-10-05 08:47:19.550 GMT
By Ksenia Galouchko, Macarena Munoz and Jan-Patrick Barnert
(Bloomberg) -- Investors should ignore the uncertainty in
European banking in the coming days and weeks and just snap up
the shares, according to Citigroup Inc.’s strategist Jonathan
Stubbs, who’s been bullish on the industry since early
September.
The gap between bank stocks and credit has widened
aggressively, which along with “rock-bottom” price-to-book
valuations is a strong signal to buy, Stubbs said in note to
investors. In Citigroup’s base case of a continuing economic
cycle and higher interest rates in the region, European banks
have significant upside along with equities in the next six to
12 months.
Citigroup isn’t alone. UBS Group AG and Morgan Stanley last
quarter noted an attractive value in banking shares, though held
back from calling the industry an outright buy because of a lack
of catalysts and a potentially tough summer ahead.
More analysts have since followed, with Goldman Sachs Group
Inc. highlighting that European lenders with significant
investment-bank divisions were able to close the return gap with
their U.S. peers. French broker Oddo upgraded the industry to
overweight and Credit Suisse Group AG strategists said that
European banks’ high dividends relative to the broad market may
be a signal for a strong outperformance.
This year is no walk in the park for Europe’s banks. Stocks
almost made a new year’s low on Monday amid the Italian budget
discussion, just days after it looked like the downtrend was
finally broken. The sector has been unusually burdened in the
past three months by low quality second-quarter figures,
financial-market and political turmoil in Turkey and a money-
laundering scandal that threatened Denmark’s credit rating.
Hence investors are not jumping on the bandwagon yet. A
Barclays survey in mid-September showed about a third of
investors were “very underweight” in European bank shares, with
37 percent responding that the stocks will remain
underperformers over the next 12 months. The $1.3 billion
iShares MSCI Europe Financials ETF saw some inflows in
September, but overall the last quarter remained negative, with
about $256 million leaving the ETF.
DWS’s head of multi asset solutions, Christian Hille, said
in a Bloomberg TV interview Tuesday that it is very tempting to
invest given the cheap book values. “But I don’t see an
immediate need to be the first to go into the sector as there
still will be increased volatility in the coming months,” Hille
said.
Stubbs acknowledges that there’s evidence that investors
have reduced their allocation to European banks and warns that
equity investors aren’t positioned for inflation or higher
rates, which presents risk.
To contact the reporters on this story:
Ksenia Galouchko in London at kgalouchko1@bloomberg.net;
Macarena Munoz in Madrid at mmunoz39@bloomberg.net;
Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net
To contact the editors responsible for this story:
Celeste Perri at cperri@bloomberg.net
Jon Menon, Neil Callanan
2018-10-05 08:47:19.550 GMT
By Ksenia Galouchko, Macarena Munoz and Jan-Patrick Barnert
(Bloomberg) -- Investors should ignore the uncertainty in
European banking in the coming days and weeks and just snap up
the shares, according to Citigroup Inc.’s strategist Jonathan
Stubbs, who’s been bullish on the industry since early
September.
The gap between bank stocks and credit has widened
aggressively, which along with “rock-bottom” price-to-book
valuations is a strong signal to buy, Stubbs said in note to
investors. In Citigroup’s base case of a continuing economic
cycle and higher interest rates in the region, European banks
have significant upside along with equities in the next six to
12 months.
Citigroup isn’t alone. UBS Group AG and Morgan Stanley last
quarter noted an attractive value in banking shares, though held
back from calling the industry an outright buy because of a lack
of catalysts and a potentially tough summer ahead.
More analysts have since followed, with Goldman Sachs Group
Inc. highlighting that European lenders with significant
investment-bank divisions were able to close the return gap with
their U.S. peers. French broker Oddo upgraded the industry to
overweight and Credit Suisse Group AG strategists said that
European banks’ high dividends relative to the broad market may
be a signal for a strong outperformance.
This year is no walk in the park for Europe’s banks. Stocks
almost made a new year’s low on Monday amid the Italian budget
discussion, just days after it looked like the downtrend was
finally broken. The sector has been unusually burdened in the
past three months by low quality second-quarter figures,
financial-market and political turmoil in Turkey and a money-
laundering scandal that threatened Denmark’s credit rating.
Hence investors are not jumping on the bandwagon yet. A
Barclays survey in mid-September showed about a third of
investors were “very underweight” in European bank shares, with
37 percent responding that the stocks will remain
underperformers over the next 12 months. The $1.3 billion
iShares MSCI Europe Financials ETF saw some inflows in
September, but overall the last quarter remained negative, with
about $256 million leaving the ETF.
DWS’s head of multi asset solutions, Christian Hille, said
in a Bloomberg TV interview Tuesday that it is very tempting to
invest given the cheap book values. “But I don’t see an
immediate need to be the first to go into the sector as there
still will be increased volatility in the coming months,” Hille
said.
Stubbs acknowledges that there’s evidence that investors
have reduced their allocation to European banks and warns that
equity investors aren’t positioned for inflation or higher
rates, which presents risk.
To contact the reporters on this story:
Ksenia Galouchko in London at kgalouchko1@bloomberg.net;
Macarena Munoz in Madrid at mmunoz39@bloomberg.net;
Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net
To contact the editors responsible for this story:
Celeste Perri at cperri@bloomberg.net
Jon Menon, Neil Callanan