The cheapness of European banks is overstated by traditional valuation methods once new regulatory rules are taken into account, and investors need to rely on stock-picking to find relative value within the sector, analysts at JPMorgan say.
While the sector looks cheap on both a price-to-earnings and a price-to-book value, valuations are not attractive in European banking as a whole, as these measures do not take into account banks’ leverage, they write in a note.
“We believe banks on a sector basis are not particularly cheap... However, we see material risk-reward opportunities as valuation gaps between stocks are quite material and hence there is relative value within the banking sector.”
The bank’s top picks include UBS, Deutsche Bank , Societe Generale, UniCredit, Caixabank, Nordea and Danske, as JPMorgan takes the view that “the market is not yet pricing in the improved capital structure, funding profile and ‘real cash flow’ generation of some of the Eurobanks.”
A cautious outlook for emerging markets prompts JPMorgan to downgrade HSBC to ‘neutral’ from ‘overweight’.
However, Santander is upgraded to ‘neutral’ from ‘underweight’, “despite its material EM exposure due to underperformance against peers and Eurobanks in the past three months, some stabilization in Brazil and a more stable and predictable Spanish domestic banking environment.”
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