Commerzbank AG (CRZBY)

[Enterprising Investor]

Forget about weak European bank earnings — Citi says it’s time to dive in (4/29/16)

By Sara Sjolin

A dramatic slump in first-quarter profits. A sharp underperformance in the stock markets. And an indisputable difficult business environment.

No, 2016 hasn’t been great for the European banking sector, but it’s time to perk up on the unloved industry and load up on shares while they are still a bargain, analysts at Citigroup say.

In a note dated Thursday, the analysts argued that the losses over the recent year — the Stoxx Europe 600 banks index is down 29% over the past 12 months — make it a solid entry point into the sector.

“The recent derating provides a good cushion for disappointment at a time when various macro drivers should provide a more positive support for the sector, i.e., rising oil prices/CPI, narrowing credit spreads, stabilizing GDP,” the analysts wrote in the note.

“We see the case for moving more positive on European banks and move to overweight in our European sector strategy,” they added.

Of course, there have been many false dawns for the banks over the past few years. In 2009 and 2012-2013, sharp relief rallies occurred after periods of serious concerns about the global economy and the future of the eurozone. But those rebounds “appear insignificant” when you look at the consistent underperformance over the last decade, Citi said.

Since 2003, the segment has been the worst performing sector in Europe, with half of all the region’s banks underperforming the market by at least 50%. This has been because of a flagging European and global economy, building of capital buffers, deleveraging and dealing with a raft of new regulations postcrisis.

Then came the brave new world of negative interest rates, which has been criticized for squeezing net interest margins and eroding bank profits. The first-quarter earnings season is partly a testament to that, with major banks reporting significant declines in profit. At Deutsche Bank AG for example, net income sank 58% in the first three months of the year, while earnings at Spanish lender BBVA tumbled 54%.

“The recent underperformance of European Banks has been sharp. The sector’s derating has been aggressive. The sector is back toward its post-1980 lows on price/book,” Citi explained.

But the U.S. bank is more optimistic on the future for its European peers when looking into the rest of 2016 and to 2017 and 2018. Rising oil prices and receding fears of a global recession play a major part in this, and so do signs of rising core inflation in the U.S. and the U.K.

Additionally, they are more upbeat on the earnings outlook and see an almost 10% annual growth rate in profits for 2017-2018. Among banks that are set to bring about the biggest upside, but with the greatest protection against risks, Citi pointed to Lloyds Banking Group PLC, BNP Paribas SA, Danske Bank AS, KBC Group NV, Banco de Sabadell and Commerzbank AG.

There is a major caveat to Citi’s positive outlook on Europe’s banking sector, though: The June 23 Brexit referendum in the U.K. on whether the country should leave the EU.

“In the near-term a vote for the U.K. to leave the EU in late June would likely be disruptive for banks across the region and especially in the U.K., although Citi’s base case remains for no Brexit,” the analysts said.

http://www.marketwatch.com/story/forget-about-weak-european-bank-earnings----citi-says-its-time-to-dive-in-2016-04-29