European banks have better than expected capital strength and cost control, but need earnings momentum to return to the sector if it is to outperform, Exane BNP Paribas says.
Banks in Europe have so far reported on average a 43 percent contraction in fourth quarter earnings, while revenues in the same period are down 3.8 percent, according to Thomson Reuters Starmine Data.
And over the last 30-days, analysts have cut their earnings forecasts for the first-quarter by an average of 2.6 percent and for the full-year 2013 by 1.7 percent, according to Starmine.
"This is slightly concerning, as we have often highlighted the fact that given the material reduction in the cost of equity we need to see earnings revisions to jusitfy a further uptick in banks' share prices," Exane says in a note.
Analysts at Exane remove Lloyds and Swedbank from their top picks list, although they retain a 'outperform' rating on the stocks. Lloyds has outpaced the market by 30 percent in the last 12 months, while Swedbank has performed 22 percent better than the market this year.
Following earnings season, Exane add Credit Agricole to its "top picks" list, joining Barclays and Credit Suisse, and replacing Societe Generale.
"The disappointing development of solvency, cost of liquidity and cost of risk in French SMEs in Q4 will weigh on shares, whereas [Credit Agricole] will exhibit significantly improved earnings predictability, surprising solvency and improved management credibility."
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