Banco Sabadell: from Over to Equal-Weight, and P. O. from 1.20 to 1.10 eur/share

Morgan Stanley | Bank analysts raised the sector to Attractive a few weeks ago because our macro no longer expects depo-type cuts and this increases confidence that profit estimates have hit a minimum in 2H19. We estimate a flat growth of the NII (+ 0.6%) in 2020 and 2021. There is optionality in the charge for deposits (could add 3% to the NII of the Eurozone banks).

Given the current search for profitability, European banks are an attractive option, as they offer on average a cash yield of 6%, 150bp above the market. Lloyds, DNB and KBC are the main dividend ideas. We expect greater use of buybacks as an alternative to dividends, which would be a clear signal of balance repair.

With the recent inflows into European equities (3bn euros since October vs. 100bn euros outflows in 9M19), we believe that the main beneficiaries would be: 1) asset managers with greater exposure to Europe (AMUNDI and DWS) and 2) Banks with strong model of insurance banking and asset management (KBC, Credit Agricole, Caixabank).

TOP PICKS BANKS: Caixabank (included on the list today), Credit Agricole, KBC, Lloyds, Santander and Unicredit. We get DNB.

TOP PICKS DIV FINANCIALS: AMUNDI, DWS and Partners Group.

Changes of recommendations:

Banco Sabadell (SAB): Alvaro Serrano raised the OverWeigh (OW) recommendation in May with the expectation that NPA sales, improvement in TSB and a capital near 12% CET1 would improve the visibility of benefits from 2020. He has risen 40% since the summer lows and, although he still expects that they will meet NPA’s capital and sales goals, he has less conviction at TSB after the investors’ day last week. It reduces its target price by assuming a higher cost of equity (11% vs. 10%).