UBS | With 1Q16 results over it is time to take stock. European banks are down 18% YTD against a market 5% lower, with continuing hair-raising volatility in parts of the banks index. Our estimates changed surprisingly little during results: interesting considering the bearishness of many investors we meet. Over the season we cut adj. PBT estimates for 2016-2018 by 1-2%: we expect this is less than many would suppose.
… with poor sentiment leaving banks the cheapest sector around
Low, flat yield curves, weakening growth and political instability are risks applicable to a growing list of countries. As regulated, operationally and financially geared entities, banks should not expect to be immune from such concerns. But modest estimate revisions and poor stock performances see the Eurobanks P/E relative two standard deviations below history. On a global basis, banks are cheaper on forward earnings than all sectors other than Autos & Auto Components (a sector closer to peak than trough earnings) and yieldin g more than any other large sector.
At-weight Europe, overweight US, underweight EM: Concentrated top picks list
Despite the relative discount of the sector we maintain a narrow top picks list, concentrating on banks with excess capital now, high dividend payout policies which constrain strategic drift, operations in a limited number of countries and an underweight representation within the earnings mix devoted to market-related activities. Our top picks are ING, LBG and Swedbank; our least preferred names are BBVA, Handelsbanken and StanChart.