LONDON Buying European bank stocks would be the world's biggest contrarian trade, Citi analysts said, adding they expect both returns and asset quality to improve next year.
Banks in the economic and monetary union in Europe are the worst performing sector over the past decade among the 285 sectors which Citi tracks globally.
The U.S. investment bank stopped short of recommending an outright "buy" on the sector, given that banks still face headwinds from low inflation and low interest rates while earnings expectations remain under pressure.
"History says 'Buy', but our key message is do not 'Underweight' the sector," said Citi analysts, led by Jonathan Stubbs, in a note to clients.
Danske Bank (DANSKE.CO), Standard Chartered (STAN.L) and BBVA (BBVA.MC) are the U.S. broker's preferred picks, while it counts HSBC (HSBA.L) among its less preferred stocks.
Banks globally have been on the backfoot since the 2008 crisis. Citi noted that emerging markets are the only region in which banks currently trade above their book value.
European banks .SX7P, down 22.6 percent this year, currently trade at about 0.7 times book value while Japanese banks, at about 0.5 times, are the world's cheapest, according to Thomson Reuters data.
(Reporting by Vikram Subhedar; Editing by Sudip Kar-Gupta)