On the front foot: European banks upgraded from N to OW
This morning, we increase the weight of the European banking sector from N to OW. Persistent signs of a better economic activity in Europe, the likely forthcoming increase of inflation expectations and the removal of the French electoral roadblock should all lead to an increase in LT bond yields and a corresponding outperformance of banks’ stocks. Our
increased coverage (Spain and Germany) enables us to widen our Most/Least Preferred Stocks to four names each and we point at the spectacular recovery of the lists’ performance since we downgraded the sector (-1.6% YTD vs. -9% in February). In light of our new OW rating, we reintroduce France into the Long list (with Société Générale (Buy, TP EUR53.6) replacing Santander) and we increase the weight of Italy: Anima (Buy, TP EUR6.8) is the newcomer and joins UBI (Buy, TP EUR4.3). On the short side, no change to existing names: we add newcomer Mediobanca (Hold, TP EUR8.0) as a hedge against Anima and UBI.
We upgrade European banks from N to OW
We discuss: 1) the second leg of the asset rotation following the period of consolidation that led to our downgrade of the sector in February; 2) the perceived geographic shift of the so-called “reflation trade” from the US to Europe; and 3) the removal of the French election roadblock.
We make marginal changes to our Most/Least Preferred Stocks
We believe it makes sense to reintroduce France (via SocGen) into our Most Preferred Stocks at the expense of Santander (global growth proxy).On top of UBI, we also add Anima, in our view an underrated consolidator within the asset management industry. We keep Credit Suisse (Buy, TP CHF18.0). Our Most Preferred Stocks strikes us a satisfactory mix between periphery exposure, good quality, restructuring and attractive valuation, in our view. On the short side, we remain happy with Julius Baer (Reduce, TP CHF45.00), Popular (Reduce, TP EUR0.40) and RBI (Hold, TP EUR18.5). We introduce Mediobanca (Hold, TP EUR8) into our Least Preferred Stocks as a hedge against our two Italian Longs.
Potential curveballs: what could go wrong?
Our OW call on banks is fully consistent with the top-down investment narrative that we have developed since H2 2016. It is nonetheless slightly less straightforward than it was then, as: 1) the valuation of the sector is slightly less attractive (0.9x PTBV, 10x P/E); 2) the increase in LT interest rates remains a cornerstone of our positive view, but its impact on earnings could be back-ended to 2019E; and 3) the Q1 earnings season could be mixed, raising questions about its ability to fuel further EPS increases.