European Banks : Initiating on DBK (Underperform); UBS (Neutral): Lagging US peers
■ We initiate coverage of Deutsche Bank and UBS, expecting them to lag US peers as earnings estimates and capital returns continue to diverge. Our proprietary Credit Suisse HOLT® valuation tool supports our view, highlighting US banks’ superior risk-adjusted returns and leverage. We prefer JP Morgan and Goldman Sachs over UBS, and Bank of America over DBK for restructuring potential (JPM, GS and BAC rated Outperform by our US colleagues, Susan Katzke/Christian Bolu.
■ Following a detailed comparison of European and US deleveraging costs, litigation risk and capital adequacy, we find we are below consensus on EU EPS and DPS forecasts (notwithstanding an improving Q3 in FICC trading). With a number of moving parts, we show granular blue/grey sky valuations for DBK and UBS.
■ Deutsche Bank (Underperform, €13 target price): The low valuation of under 0.4x current TBV is anchored by a low ROTE. We think the slow filling of the €7bn capital shortfall will lower dividend expectations and keep the shares under pressure, with limited upside potential from further restructuring and risk from litigation settlements.
■ UBS (Neutral, CHF15 target price): A more profitable business mix and stronger balance sheet justify a higher valuation and better long-term distribution prospects. However, UBS is not immune from margin pressure or the need to build capital ratios, which should limit upside surprises to consensus, in our view.