Gradual re-rating possible for "cheap" euro zone banks - Berenberg
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GRADUAL RE-RATING POSSIBLE FOR "CHEAP" EURO ZONE BANKS - BERENBERG
A defensive tone usually accompanies discussions around euro zone banks as market players mull possible headwinds presented by lower short-term interest rates.
But expectations about net interest income are already in line with the effects of lower interest rates, according to Berenberg, and a gradual re-rating could be in store for the sector.
"Our analysis suggests that, in aggregate, consensus NII expectations adequately reflect the effects of expected lower interest rates."
"As such, greater confidence about euro zone banks’ outer year profitability should result in a gradual re-rating for the sector," writes analyst Michael Christodoulou.
Despite the space recently outperforming, it is trading on 6.75x one-year forward EPS with a dividend yield double that of the broader market, making it cheap, according to Christodoulou.
Another supportive factor are steeper yield curves.
"Short-term interest rates are expected to fall while long-term interest rates remain broadly stable, resulting in an upward sloping yield curve," he says.
Apart from during the GFC, such conditions have usually been favourable for banks.
Lower short-term rates can result in a recovery of loan growth and of transactional and wealth banking revenues. In light of the offered returns, current valuations look too low, according to Berenberg.
Strong returns to shareholders is another consideration, with Eurozone banks’ improved earnings outlook and balance sheet strength support strong capital distributions
Berenberg's preferred banks in the sector are AIB AIBG.I, Bank of Ireland BIRG.I, BNP BNPP.PA, CaixaBank CABK.MC, ING Groep INGA.AS and UniCredit CRDI.MI, all with a "buy" rating.
(Lucy Raitano)
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