UK names offer best value in EU banking sector, says UBS
UBS sees European banking stocks offering fundamental value and picked Barclays and Lloyds Banking as its preferred UK picks.
Banks
4,026.41
12:55 25/04/24
Barclays
202.30p
12:55 25/04/24
FTSE 100
8,095.58
12:55 25/04/24
FTSE 350
4,446.07
12:55 25/04/24
FTSE All-Share
4,399.69
12:55 25/04/24
Lloyds Banking Group
51.66p
12:55 25/04/24
NATWEST GROUP
289.20p
12:55 25/04/24
The European sector as a whole is trading at 9.7 times 2019 forecast EPS and equal to TNAV for a forecast return on total equity of 11%.
"But at an aggregate level we expect pressure on consensus EPS estimates ahead of 2Q18 driven by net interest income estimates which we regard as too optimistic and fee forecasts which need to be reduced to account for weaker and more volatile markets."
UBS analysts expect to be "much more constructive" on banks by October or before, once there is clarity on an Italian budget and Spanish bank tax, but remains "fairly cautious in the very near term, attractive valuations notwithstanding".
Ahead of second quarter trading updates, the UK banks offer among the best value in the sector and the outlook for positive earnings revisions is seen as more attractive.
Although politics and Brexit negotiations in particular dominate headlines, analysts expect Barclays and Lloyds to at least match consensus expectations in the second quarter.
"Net interest margins – the key sector risk in many investors' minds – should prove at least stable in 2018 and into the EU transition period, helped by falling wholesale funding costs, a slight increase in flow mortgage spreads and positive mix shift."
The analysts are most cautious on HSBC, though its ringfence bank is not expected to further pressure industry spreads, with UBS keeping a 'neutral' stance on the Asia-focused giant, RBS and Standard Chartered.