Banks: buy in a tactical view, but not in a strategic view

European banks could be at this moment an investment opportunity. But only in a tactical view, or in other words as a short-term investment. It's the opinion of Credit Suisse. Here the reasons and the stocks to call.

The banks sell-off is overdone 
Tactically, the following factors are supportive: i) banks have sold off on concerns over developed market growth, but now the gap between their performance and PMI new orders is close to a post-crisis high; ii) banks' credit has lagged the sell-off in bank shares, suggesting this has not been about credit crisis concerns; iii) banks are the most leveraged sector to high-yield spreads, which are pricing in a 70% chance of a recession; iv) banks' performance remains correlated to the oil price (because of exposure to the energy sector and the correlation of oil with bond yields), and we think the oil price has troughed; v) sector risk appetite remains very depressed (and banks are the most correlated sector to this).

Valuations are also supportive
European banks are pricing in a 50% chance of a crisis/economic recession, which we consider too high (with European banks trading at a 20-year low relative to US banks).

However, we do not currently view the European banks sector as an attractive long-term investment, despite our positive short-term stance, because global debt to GDP is at an all-time high (and banks are directly and indirectly affected by the leverage cycle), their leverage is still high (22x in Europe) and there is significant regulatory, tax, litigation risk and pressure on fee income. Political risks in Europe remain high, posing a threat to banks.

Stock calls
Our European banks team's top picks are Erste, Danske and Intesa. From a top-down perspective, we would focus on banks with high fee income, good cost control and attractive valuations. We prefer European to US banks but would recommend a tactical overweight of US banks at this stage (e.g. JPM and Citi). We maintain our long-standing underweight of investment banks.

Source: Credit Suisse Securities Research & Analytics