European banks are getting closer to fair value in absolute terms, while remaining substantially undervalued relative to interest rates. We continue to advise being over-weighted in European banks although stock selection will become more important because of the expansion of valuations on an absolute basis. In particular, German banks (Commerzbank and Deutsche Bank) appear as the most attractive on a relative value basis relative to other European banks. We expect that European banks as a whole will continue to outperform the STOXX Europe 50 as they have been doing since 2012
To conclude, we continue to recommend an overweight allocation to European banks, and the valuation cycle suggests that they will continue to outperform. However, as banks approach fair value in absolute terms, stock selection is becoming key, and we are recommending “wholesale” buying of the sector. Out of the universe of European banks, all three listed Portuguese banks – BPI, BCP, and BES represent outstanding value, both in relative and absolute basis. Barclays and Credit Suisse are our top picks within the large cap global players. On the short side, we remain negative on Scandinavian banks and would recommend to exit the French banks, in particular BNP. SUMMARY OF RECOMMENDATIONS BUY BARCLAYS (BARC LN): 254p DEUTSCHE BANK (DBK GR): 34.8 COMMERZBANK (CBK GR): 9.3 CREDIT SUISSE GROUP (CSGN VX): 27.0 ERSTE BANK (EBS AV): 26.5 BANCO SANTANDER (SAN SM): 6.4 CAIXABANK (CABK SM): 3.7 BANKIA (BKIA SM): 1.03 BANCO DE SABADELL (SAB SM): 1.85 BCP (BCP PL): 0.11 BANCO ESPERITO SANTO (BES PL): 1.01 BANCO BPI (BPI PL): 1.16 SELL / SHORT NORDEA (NDA SS): 82.0 SVENSKA HANDELSBANKEN (SHBA SS): 297 UCG IMSE BANKEN (SEBA SS): 78.8 BNP (BNP FP): 53.6 LLOYDS BANK (LLOY LN): 74.9 07 November 2013 LONG / SHORT or SWITCH IDEAS (relative value) LONG BNK FP / SHORT EUROSTOXX (MSE FP) LONG BNK FP / SHORT SWEDISH BANKS (SEBA SS, NDA SS, SHBA SS) – mean reverting LONG CSGN VX / SHORT UBSN VX – (long bias) LONG CSGN VX / SHORT BNP FP – (long bias) – mean reverting LONG CSGN VX / SHORT XLF US – (long bias) – mean reverting LONG BARC LN / SHORT LLOY LN – (long bias) LONG BARC LN / SHORT BNP FP, SEBA SS – (long bias) – mean reverting LONG BARC LN / SHORT XLF US – (long bias) – mean reverting LONG GLE FP / SHORT BNP FP – mean reverting / wait for pullback LONG DBK GR / SHORT BNP FP LONG SAN SM / SHORT BNP FP – mean reverting LONG UCG IM / SHORT ISP IM