The World’s Biggest Contrarian Trade…European Banks
* Macro backdrop improving for banks — Euro Area nominal GDP growth c2.5-3%
in 2017; likely to see further improvement in credit dynamics, assuming ECB
continues to deliver accommodative monetary policy stance. As demand for loans
increases, lending volumes likely to rise, offsetting some bank lending margin fears.
* Bank headwinds from inflation & rates — Harvinder Sian, Citi’s head of Global
Rates Strategy, sees further headwinds for European banks from ECB policy, ie
NIRP, although is “leaning against ECB rate cut expectations”. Harvinder sees
challenges in low inflation, priced to 2023 and in low real neutral rates.
* Pick-up in bank returns expected — Citi’s European banks team see a mix of
opportunities, improvements and challenges for the sector. Returns (ROTE) are
expected to improve in 2017, but EPS are still falling. The sector has more capital,
while RWA has declined. Danske, Standard Chartered, BBVA = preferred stocks.
* World’s biggest contrarian trade — EMU banks are the worst performing
sector/region combination in the last 10 years out of 285 sectors we track around
the world. This makes the sector the world’s biggest contrarian trade. History says
Buy, but our key message is do not Underweight the sector. We would prefer to own
Bank Proxies ahead of the sector. See inside for seven proxy strategies.