2014 Outlook: 10 key themes and top picks
The AQR/stress tests, unconventional ECB policy and new regulations will make 2014 a pivotal year, we think. Stabilising share counts, peaking asset quality and better operational gearing can offset sluggish macro. Our base case has 14% upside in 2014; restructuring & divis are key to our picks.
Our views on the key debates for 2014:
1) The Asset Quality Review may prove more cathartic than the market fears, after heavy 4Q/1Q charges;
2) We expect a lot more unconventional ECB policy channelled via the banks as hurdles for QE look too high.
3) NII is likely to disappoint for the Spanish banks (less for Italians) & overhang the asset quality recovery trade.
4) Cost cutting and restructuring will become critical to differentiation, given low rates and weak macro.
5) Broad divi restraint and more restructuring are likely, we think, given leverage ratio and higher buffers, but we hope selectively divis will grind higher.
6) Fixed income trading may disappoint in 2014; banks need an equity or corporate bias to outperform, we think.
7) Help to Buy scheme should surprise positively, stimulating credit, construction and confidence.
8) Balkanisation will be one of the largest challenges for global banks; cross-border EU M&A will likely disappoint.
9) Multi-asset funds likely to be the fastest growing category as clients rotate to risk assets.
10) Lacklustre EEMEA growth convinces us that truffle hunting is required.
Restructuring, portfolio, cost cutting and divis critical to performance, with Eurozone banks trading
at 1x TNAV and Swiss/Nordics/global players at 1.5x, on our numbers. Most preferred: ING, UCG, UBS, LLOY, BNP, SWED (upgraded to OW), LSE; in EEMEA, SBER.
Where could we be wrong? Macro remains, as ever, the biggest risk on the up and downside. Disinflationary pressures in the South remain high. Disappointments on AQR and regulation are also key.