Biggest Opportunity for the Global Reflation Trade: Biggest upside to EPS and bull case values are across Japan, Spain, and Italy. We want to own the optionality that global reflation holds and that the policy rates in the two regions may rise sooner than expected.
Japan: Risk to the Upside If NIRP Ends Sooner than Expected. Japanese banks are the most asset-sensitive across regions. MS Japan macro team expects the BoJ to end NIRP in 4Q18. This is reflected in our bull case. More upside to our estimates if bull case migrates into the base case. Way to play: Resona Holding (OW, PT ¥730, 29% upside to base case and 53% to bull).
Spanish & Italian Banks Best Reflation Play in Europe, In Our View. Our NII estimates for 2019 are 3.5% above the Street, suggesting that consensus has not fully baked in reflation expectations. Also, these banks are one of the most asset-sensitive in the group. A 10 bps increase Euribor should boost EPS by 4.3% vs. ~1% European peers. Way to play: CaixaBank (OW, PT €4.80, 14% base case upside).
US Bank Stock Valuations Likely Reflect a Conservative Deposit Beta Assumption, underestimating the full rate benefit. We think consensus is tied to bank disclosure which bakes in a 50% through-the-cycle beta assumption vs. current ~10% beta. US banks beat our NIM estimates by median 0.7% in 1Q17. Expect more EPS upside as deposit betas likely remain lower than 50% over the next 2-3 hikes. Banks with higher consumer vs. corporate deposit skews could see lower betas for longer. Way to play: BAC (OW, PT $26, 13% base case upside).