These cheap European stocks yield up to 8.1%

To welcome Sweden’s music-streaming star Spotify Technology on its trading debut this month, the New York Stock Exchange briefly, and mistakenly, flew the Swiss, rather than the Swedish, flag.

The Swedes took it in stride. Now it looks as if investors could be underappreciating another Swedish strength: its big banks. This could also be temporary.

Sweden’s big-bank stocks have slumped over the past year, weighed down in part by worries about their exposure to a domestic housing market that, after a period of running hot, has cooled. The selloff appears overdone and presents an opportunity, according to the bulls.

Investor should consider buying shares in four Stockholm-based banks, says a team of UBS strategists led by Daniel Waldman in a recent note. They suggest placing equal bets on Swedbank , Skandinaviska Enskilda Banken  , Svenska Handelsbanken , and Nordea . Sharp moves in global markets and a shifting macroeconomic backdrop have presented challenges this year, but investors “should not refrain from taking risk,” and these stocks provide a way to catch a ride on broadening European economic growth, they write.

There may be “some froth” in Sweden’s housing market, but the economy remains strong and recent home-price declines and rising supply don’t signal the start of a big unraveling, they say. Nordic banks stocks have been trading at a lower price/earnings ratio than the overall sector, discounted by about 2%, and “offer good risk/reward,” the UBS team reckons.

The four banks offer fat payouts to shareholders, too. Dividend yields range from 6.7% for Skandinaviska Enskilda Banken, known as SEB, to 8.1% for Nordea, which plans an October move to Finland to reduce regulatory costs.

In a recent note JPMorgan analyst Vivek Gautam argued that market concerns about Swedbank’s loan growth and profit margins are overblown. He has an Overweight rating on Swedbank stock and a price target of 240 Swedish kronor ($29), implying a rally of more than 30% from its recent print just over SEK180. It’s his top pick among Nordic banks.

Challenger banks – newcomers to the mortgage business – have taken market share from Sweden’s big four over the past three years. But Gautam and his colleagues believe the large lenders’ piece of the pie has just edged down to 75.7% from 79.5%, and they’ve largely maintained their mortgage margins. Swedbank looks poised to grow its loan business at about 4% per year, with mortgages expanding by 5% and corporate loans showing improvement after declines in 2017, JPMorgan’s team reckons.

Swedbank’s forward P/E has on average been 11% above its sector over the past decade, but recently the premium has dropped to just 3%, Gautam notes. Shares have been changing hands at a not-so-rich 10.5 times estimated forward-year earnings, according to FactSet Research data.

Bulls on Sweden’s banks are also talking up a boost from rising interest rates. Banks tend to benefit from higher rates because they can earn more from the spread between what they pay savers and their interest income. The Riksbank, Sweden’s central bank, has been keeping a benchmark interest rate at a record low of minus 0.5%, but has said rates are set to rise in the second half. So consider raising a Swedish flag and enjoying that tailwind.

This report also appears at Barrons.com.