Goldman Sachs' European Banks To Buy Post-Brexit

Weaker operating trends have been predicted for European banks over the next couple of years, following the Brexit decision. Goldman Sachs' Jernej Omahen revised estimates down, while expressing concern around banks not being able to cover their COE [cost of equity] over the medium term. The analyst noted the top picks amid this challenging operating environment.

Post-Brexit Macro Scenarios

Incorporating post-Brexit macro scenarios, the net income estimates for European banks have been reduced by €32 bn for 2016-2018. Analyst Jernej Omahen cited the main reasons as:

1. Weaker revenue outlook, with lower volumes and tight margins
2. Increased credit risk
3. Broadly flat costs

Top Picks

Amid the challenging operating environment, with banks not expected to cover their COE over the medium term, Omahen mentioned the following investment themes:

• Large cap value: Certain banks were poised to benefit from easing regulatory pressure and had high cash dividend yields. The analyst reiterated Buy ratings on BNP Paribas and Banco Santander, S.A. (ADR) SAN.
• Steady state: Certain banks have a high return profile and capital flexibility. The analyst reiterated a Buy rating on KBC, while upgrading Erste Bank from Neutral to Buy.
• UK: Royal Bank of Scotland Group PLC RBS has a strong capital position and a structurally advantageous funding profile.
• M&A: Shares of Italy’s BPER do not fully reflect the company’s balance sheet resources and consolidation options. The analyst reiterated a Buy rating on the stock.

These stocks were named by Omahen as the top picks and are included in Goldman Sachs' Conviction List.