Two months ago Alphavalue mentioned that investors’ opinion on the banking sector is as strong as the yield curve and the volatility in the financial markets. As both elements were very tame, investors had less interest. But the research house suggests buying into this weakness.
The year that has just started looks like one of those textbooks opportunities which appear by magic at the beginning of a new year. The banking sector has risen strongly, only beaten by Metals&Mining and Automotive. This ranking suggests that feelings are under control and we are not facing a shift in fundamentals.
All the protagonists in the banking sector are clearly confirming that it’s not just a case of rediscovering a handful of quality names. The following table which shows the Price/Book Value ratio of the sector for 2018 at levels of 0.94x shows the banks are at recent maximums from a valuation point of view.
In AlphaValue’s evaluation models, the sector is trading close to what could be considered as “expensive”.
We see a combined potential in our coverage of +3%, below the +5% calculated for all AlphaValue’s coverage for the next 6 months. The shares which still have a significant upside are Barclays, Lloyds, Sabadell, BBVA and Societe Generale. They all have potential growth of over 15% on a six months horizon. Only Lloyds and Sabadell combine a strong potential with positive sentiment, so they may offer a quick return.
On the other side of the coin, DNB and HSBC shares are expensive from a fundamental point of view, but they are enjoying strong upside. The message now is the same as the one we sent out two months ago. For centuries, it has been clear that long-term investors in the banks prefer those which are mainly focused on their lending business models than others which hope to cruise along and take advantage of the market’s volatility.
The six Scandinavian banks tracked by AlphaValue trade at 1.32x their book value for 2018.
They have lost a bit since their top level of 1.47x, but investors are clearly not coming out of these banks due to their high multiples. Investors’ preference for quality is clearly expressed via the following graphic which links the ROE with the P/BV ratio for 2017.
In the case of the Scandinavian banks, being “boring, local and focused on technology” (Sweden is fast moving towards becoming a society without cash) is a much more attractive combination than the big global banking visions. Particularly if these visions satisfy the bonuses of a limited number of investment bankers.
In the short-term, and still being positive, analysts think that there is no need to go on a mad buying spree during this fresh wave of interest in the banks. Even if the case of stronger GDP growth in Europe signifies a kind of cyclical awakening.