Analysts at Bankinter offer an investment strategy for the European banks ahead of the new year. Overall they reiterate their recommendation to maintain a structural position in banks due to the improvement in the quality of their balances and the recovery in business volumes.
“We believe that 2018 offers an opp0rtunity for buying banks which we consider are interesting for their high earnings growth potential at very attractive valuation multiples which are lower than the market as a whole (Eurostoxx 600). Our favourites are, in the following order: Santander, BBVA, BNP, ING, ABN, Unicredit and Intesa.”
The sector fundamentals are improving (investment volumes, credit risk, ROTE…) and with the exception of some non-systemic lenders, the balance sheets have been restructured and solvency ratios amply exceed the regulatory requirements (11.0%/12% in the main banks).
The macro outlook is favourable. GDP is growing at the fastest pace for four years (+2% in Q3’17), the business confidence indices are higher than levels prior to the financial crisis of 2007/2008 and the jobless rate – currently 8.8% – has now accumulated 14 months below 10%.
The demand for credit is recovering and credit risk is at reduced levels, at least from a historic perspective. The deleveraging of the private sector is nearing completion and the stock of credit is growing above GDP. The volume of loan investment in companies (stock) has seen the biggest rise since June 2009 (+2.9% in October vs +2.4% previously) and loans to the private individuals has gone up by 2.7% for the third consecutive month. The outlook for the banks is positive across the board (companies and private individuals). Analysts at Bankinter positively value the increase in demand for credit to invest in fixed assets and the decline in requests for refinancing.
The recovery in employment and bricks and mortar augur a good performance from the mortgage loan and consumer financing segments.
On the regulatory front, we see less pressure from the institutions on a global level. The changes proposed by the ECB as far as provisions are concerned – a greater effort needed with those assets more susceptible of being non-productive – are focused on new production and not on the current portfolio (stock), where an important effort has already been made.
The increasing interest on the part of institutional investors for unproductive assets (NPAs from now on), means the banks can implement wholesale disposal strategies, reducing the weighting of these assets on their balance sheet faster. According to experts at the house:
When J. Powell takes over as Fed Chairman in 2018, there will begin to be a certain amount of relaxation in regulatory ambitions at an international level (Basel). Powell thinks the current situation of the banks in the US – significantly larger than their European peers – does not present a risk to the stability of the financial system and has called for relaxation in regulatory requirements.
Investment Strategy
Bankinter’s recommendation to hold a structural long-term position in the European banks, given the improvement in their balance sheets and the recovery in business volumes. They believe that 2018 offers an opportunity for buying banks with high earnings growth potential at very attractive valuation multiples. Their reasons are as follows:
1) The sector has the capacity to surprise on the upside. Consensus estimated EPS growth for 2018 over 3% reflects a difficult operational environment (volumes, margins and provisions). We don’t forecast any substantial improvement in margins – still under pressure from the ECB’s monetary policy. But we do see an improvement in business volumes and in credit quality ratings.
2) The sector is trading at a discount of over 25% with respect to the market as a whole (Eurostoxx 600) in terms of PER 2018 and estimated ROTE around 10% is attractive against the current backdrop of interest rates.
3) The “timing” of the sector will improve substantially as 2018 progresses and a more favourable scenario for margins begins to be discounted due to the expected change in the ECB’s monetary policy – an end to negative rates and a start on monetary policy normalisation.
4) The performance from the US banks (+22% YTD vs +14.5% in Europe) suggests we should think about an upwards revision to the sector’s multiples.
Favourite banks
Bankinter’s list of favourite banks for 2018 includes (1) Banco Santander, 2) BBVA for its diversification at a geographical level and high ROTE, 3) BNP Paribas for its focus on cost management to improve its Profit & Loss account, 4) ING and 5) ABN for its high solvency ratios and presence in countries with attractive macro fundamentals. Then 6) Unicredit and 7) Intesa trade at interesting valuation multiples. Their risk profile is higher due to the heavier weighting of unproductive assets on their balance sheets and the elections in Italy in 2018.
We believe Unicredit has the ability to suprise on the upside and that the target return established in its strategic plan (ROTE of 9% in 2019) is conservative. Intesa’s dividend yield (~ 7% ) is one of the biggest in Europe and we hope that its updated strategic plan – due in February 2018 – will be a catalyst for the stock.
