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Government-assisted better economic trends have resulted in lower expected bad
debts, and bank pre-provision profitability again held up better than we expected
over the Q2 earnings season. As bad debts normalise, we expect sector returns
on tangible equity to return towards an above consensus 15% to 20%, but we
expect the sector to be growth-starved and unable to supply credit. This creates
negative feedback risks for the broader economy, increasing the chances of
monetary policy being kept loose for too long, in our view.
Deutsche Bank AG/London
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Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Economics
Companies featured
UBS (UBSN.VX),CHF18.70 Buy
2008A 2009E 2010E
EPS Adjusted (CHF)-4.88 -0.62 1.67
P/E Adjusted (x) -3.1 -29.9 11.2
Credit Suisse Group (CSGN.VX),CHF51.50 Buy
2008A 2009E 2010E
EPS Adjusted (CHF)-6.54 6.21 6.51
P/E Adjusted (x) -4.4 8.3 7.9
Barclays (BARC.L),GBP351.30 Buy
2008A 2009E 2010E
EPS Adjusted (GBP)24.53 18.46 39.54
P/E Adjusted (x) 6.3 19.0 8.9
BNP Paribas (BNPP.PA),EUR53.63 Buy
2008A 2009E 2010E
EPS Adjusted (EUR)2.55 5.13 4.77
P/E Adjusted (x) 11.9 10.4 11.3
Banco Santander (SAN.MC),EUR10.30 Buy
2008A 2009E 2010E
EPS Adjusted (EUR)1.29 0.95 0.92
P/E Adjusted (x) 5.2 10.8 11.2
National Bank of Greece (NBGr.AT),EUR22.20 Buy
2008A 2009E 2010E
EPS Adjusted (EUR)3.30 2.22 2.15
P/E Adjusted (x) 4.0 10.0 10.3
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Earnings trends: pre-provision holds up, most of the pain is cyclical
Overall in Q2 we were surprised at the resilience of pre-provision profit. So far, we
have seen cyclical pain for the banks, but pricing changes and selective
deleveraging has meant that underlying profitability has been better than we
expected, a positive surprise. We think these trends will continue.
European Commission regulatory changes: a tougher outlook
Our view is that investment banks are prepared for regulatory change (as
discussed in our 30 July report). But we see bigger issues at the retail and
commercial banks, where we think that profits will stay depressed longer, we
expect more future regulatory changes, and where deleveraging is taking place at
a slower pace than in the investment banks.
This creates a second order risk. Up until now, demand for credit has been low
(falling inventories, slashed capex, limited house price appreciation). But sustained
recovery should drive a pick-up in demand. We think that banks will be unable to
satisfy this, leaving the broader economy starved of credit compared to previous
cycles. Moderate inflation would deflate the real value of debt and create a
persistently upward facing yield curve, albeit this only supports investment banks,
and contrary to consensus views would actually hurt retail and commercial banks.
Inflation would also assist bank deleveraging and the funding gap (also see
Deutsche Bank’s Global Economic Perspectives: On fiscal deficits and inflation,
dated 2 September 2009). This will not be positive for equity markets overall as
equity risk premia will rise. But we see inflation as likely to lead to outperformance
by the European banks, especially the investment banks.
European Banks trading on 1.4x 201E P/TBV
European Banks are currently trading on 12.7x 2010E adjusted EPS, or 8.4x 2011E
adjusted EPS (when bad debt charges are forecast to be closer to normal). In price
to book terms, the sector is trading on 1.4x P/TBV. We think that 15% to 20%
RoTEs are achievable, implying sector upside. We also think that investment banks
in particular will outperform in a steeper yield curve inflationary environment. Our
top picks are Credit Suisse (TP CHF 70), Barclays (TP GBp 4.00), UBS (TP CHF 20),
BNP Paribas (TP Euro 59), Santander (TP Euro 12.5) and NBG (TP Euro 27.5), all
rated as Buys with sum-of-the-parts based price targets. The key risks to our
outlook would be a sharp correction in risk appetite, or an early shift in policy to
fight inflation and remove monetary stimulus.
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