Credit Suisse Raises European Banks to Overweight, Still Prefers U.S. Banks
Credit Suisse has upgraded European banks to overweight from benchmark this morning as they see clear signs of macro improvement in the Euro area, attractive valuations, falling provisions (which will boost earnings), and possible a surprise from the ECB. They like HSBC (NYSE: HBC) and Deutsche Bank (NYSE: DB) to name a few.
Notably, they maintained the overweight rating on U.S. banks and Japanese banks. In the U.S., they see a steepening yield curve, earnings momentum, and accelerating loan growth as catalysts for banks.
For U.S. banks, they list several top picks including J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C), and State Street (NYSE: STT). Strategist Andrew Garthwaite noted that the bank still prefers U.S. banks to their European counterparts and wrote that, "US bank assets only account for 80% of GDP, while Euro-area banks' assets account for 300%+ of Euro-area GDP."
They also note that political pressure on European banks could weigh on prices while U.S. banks may face less pressure. "Total assets of the largest US banks by assets, JP Morgan, are equivalent to only 15% of GDP, while the largest Euro-area bank, Deutsche Bank, has assets equivalent to 75% of German GDP. This suggests there is less political pressure on US banks to reduce the size of their balance sheets."
"In spite of the recent rebound in Euro-area economic momentum, the growth outlook continues to be significantly better in the US, which improves the scope for stronger loan growth and lower default rates."
Finally, they note an improving household sector in the U.S. and lack of dependence on bank funding as key reasons why U.S. banks should outperform their European counterparts. "The US household sectors appear to have deleveraged successfully, while some parts of the private sector in the Euro area (and, in particular, in the periphery) continue to look overleveraged, raising the risk of additional credit losses. There has already been substantial dis-intermediation in the US, with 84% of corporate funding through non-bank lending, compared to 19% in the Euro area."
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