MW European bank stocks are a better bet than U.S. peers, says JPMorgan
By Jamie Chisholm
Investors should consider buying European bank stocks ahead of their U.S. counterparts, according to analysts at JPMorgan.
"It has become evident that the more we compare Europe to the rest of the world, European Banks look relatively more attractive on most measures," said a team of European equity strategists led by Kian Abouhossein.
In a note released Tuesday, Abouhossein and colleagues said that based on estimates for 2026, European banks' as a sector traded on a price to earnings ratio of 7.3 times, a price to tangible book value of 0.9 times, and delivering 12.7% return on tangible equity.
This compares favorably with the richer valuations afforded the U.S. bank sector, particularly their p/e ratio of 9.8% - a 34% premium to the European peers, which is more than the long term average of around 25%, according to JPMorgan.
The JPMorgan team also reckons European banks have less regulatory risk and "more clarity on asset quality" than their U.S. cousins.
Abouhossein admits that earlier caution on European banks has not been the right decision, with the sector delivering total returns of 15% year-to-date and outperforming the region's Stoxx 600 index, which is up 9%.
However, given earnings per share revisions for the year-to-date are down 3%, much of this rally has come as a result of an upward p/e re-rating, he noted.
Still, if the European bank sector was to reach its long-term average p/e ratio of 8.2, that would suggest upside of around 10%, says JPMorgan. It's top picks are Intesa Sanpaolo (IT:ISP) , Banco Bilbao Vizcaya Argentaria (ES:BBVA) $(BBVA)$, UBS (CH:UBSG) (UBS), Deutsche Bank (XE:DBK), and NatWest (UK:NWG) $(NWG)$.
And it's not just JPMorgan that is keen on European banks. Niall Gallagher, investment director at GAM Investments, published a note Tuesday explaining why he's retaining his heavy overweight exposure to the sector.
Gallagher also cites European banks' low p/e multiples relative to historical averages as a sign they are undervalued. And he adds investors should not worry about changes in official interest rates impacting earnings.
"[T]he overall relationship between rates/yields and bank earnings is non-linear: at most levels, there is no relationship at all," says Gallagher, who says that it's only when central bank rates get below 1.5% or so that banks start having problems.
Importantly, the European banking sector has been through "a serious amount of consolidation" which has reduced competitive intensity and the chances of price wars bringing down profitability, according to Gallagher.
High levels of equity capitalization has allowed the sector to embrace share buybacks "such that, even with the strong performance year-to-date, most of the stocks have a total distribution yield of greater than 10%, and this is likely sustainable for the next few years," Gallagher adds.
The strong share price gains so far this year means there is a short-term risk of consolidation, but Gallagher says that in his view, the fundamentals remain compelling, and the sector cheap. "Therefore, we are going to remain very overweight."
The GAM funds own UniCredit (IT:UCG), CaixaBank (ES:CABK) (CAIXY), Banco Bilbao Vizcaya Argentaria, Intesa Sanpaolo, ING (NL:INGA) $(ING)$ and Nordea Bank (FI:NDA.FI).
-Jamie Chisholm
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(END) Dow Jones Newswires
April 16, 2024 08:31 ET (12:31 GMT)
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