ab25July2024GlobalResearchandEvidenceLabGlobalEquityStrategyBanks:plentyofreasonstostayoverweight,selectively.Banksranknumber2onourEuropeanandGlobalscorecards.Whatissupportiveforbanks?Banksaretoocheap.InEuropetheyarethecheapestsectoronP/Erelatives(globallytheyarethe4thcheapestsector).ThecostofequityinEuropeisnearlydoublethepermanentwritedowncocoyetundersomecircumstancethepermanentwritedownofcocoshasbeenriskierthanequity.Thecostofequitywethinkshouldbe10%to11%,not15%+asitissomeregionsofEurope.Ourmacromodelsshows(relyingonPMIs,currencyandbonds)showsbankstohave100%relativeupside.Banksshouldbere-rated:i)thenon-macrofactorsarestructurallymuchbetter(banksdonothavedeleverinEurope/UK,litigationandfinesareonadownwardtrajectoryandsomeofthebankdisruptershaveprovenvulnerable);ii)Bankshaveprovedtoberesilienttoamildrecessions:SwedenhadarecessionyetNPLsdidnotpickup(forgoodreasons)-anywayifchargeoffsgotorecessionarylevels,theP/EofbanksgoestotheirlongrunaverageinEurope;iii)theleadindicatorsshowloangrowthreboundinginEuropeandiv)BankswethinkparticularlybenefitfromGenAI(costandcreditcontrol).Bankscouldbethenewutility-theyhavetheoneofbestcombinationofyieldinEuropeandearningsmomentumandmanyotherhighyieldsectorsarestructurallytroubled.Themacroismoresupportivethanitlooks:i)asmallfallinrateswethinkhelpsloangrowthandloanqualitymorethan...
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