Nomura sees limited room for European banks to extend their rally, arguing most of the recent catalysts are now priced in, and picks three short-term pair trades in the sector.
"With the second 3-year LTRO now passed, and the Greek PSI/bailout, EFSF/ESM merger and IMF resource expansion widely expected, new catalysts are starting to thin," the bank says.
It adds any further upside would depend on economic growth, the repricing of assets and falling standalone funding costs - all factors that Nomura sees as "some way off".
The bank recommends relative value trades such as ING, which it sees as oversold and set to benefit from restructuring momentum, versus Societe Generale, hit by deleveraging costs and uncertainty relating to the French presidential election.
It tips Deutsche Bank to benefit from first-quarter analyst earnings upgrades, over Commerzbank, which it sees as held back by dilution and asset quality concerns.
Finally, Nomura expects DNB to close its 20 percent discount to peer Nordea thanks to better capital margins and trends.
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