Bank Stocks Are Cheap. Is This a Tipping Point?: Taking Stock

(Bloomberg) -- In the stock market rally, several industries have been left out. Banks (SX7P) are still the worst-performing sector after autos over the past year, and looking at the relative rotation chart sentiment toward lenders is still poor.

Banks have been stuck in a difficult environment comprising a weak euro, falling bund yields and an extended period of low interest rates. The scene may not change overnight, but some things may push investors to take a fresh look at the sector.

Citigroup strategists said in a note on Friday that cheap value stocks are trading at a similar relative price-to-book to the levels during the financial crisis. Historically, it has proven to be a turning point, particularly for European banks. It’s the only sector trading below book value.

Nordic banks have been particularly battered this year, plagued by money-laundering allegations that may result in large fines. Investors have been warned that betting on the region’s lenders, particularly Swedbank, is risky, although voices are rising to support the sector. UBS analysts said on Friday that Nordic banks offer an attractive risk/reward. Their discount to the historical average prompted UBS to keep buy ratings on SEB, Nordea, Swedbank and Danske Bank, with 45 percent upside potential on average.

Going back to the broader sector, since breaking out of its downtrend, the Stoxx 600 Banks Index has moved sideways. The negative newsflow and a dovish ECB didn’t help. But that may change amid noise on the M&A side.

The key to the sector’s much needed consolidation might lie with cross-border mergers. This could happen when the European Deposit Insurance Scheme is implemented and liquidity can flow across borders, Bank of America Merrill Lynch analysts wrote in a note last week. These efforts are currently blocked by German and Dutch authorities, though France’s finance minister signaled Friday that Paris is backing mergers between European banks.

Finally, the ECB is meeting on Wednesday and there will be a few things to watch closely. Further information about the new round of TLTROs are expected and, more importantly, there may be details about a new approach to offset the impact of negative deposit rates for lenders, with some potentially surprising beneficiaries.

In fact, should the central bank adopt a similar scheme to Switzerland’s SNB by exempting individual amounts from negative rates, banks in Germany and France would benefit the most, according to Bastien Drut, a senior strategist at Amundi’s CPR Asset Management.
In the meantime, Euro Stoxx 50 futures are trading down 0.3% ahead of the open.

SECTORS IN FOCUS TODAY:

COMMENT:

• “U.K. shares carry a high Equity Risk Premium, but have re-rated year-to- date as investors have priced in reduced expectations of a “no deal” Brexit,” Citigroup strategists wrote in note. “U.K. equities continue to look cheap relative to history in absolute terms. The U.K. also looks attractive with the world’s highest free cash flow yield. With snap election risks rising, we continue to see companies with strong balance sheets, decent surplus free cash flow and high international exposure as a reasonable hedge versus a Corbyn-led government scenario.”

COMPANY NEWS AND M&A:

NOTES FROM THE SELL SIDE:

• Citi upgrades Norsk Hydro to buy from neutral, saying the share price now includes the shutdown of the Alunorte alumina refinery, which could become a positive catalyst and lead to a re-rate if Alunorte comes back this year. Sees minimal downside to current share price.
• Moneysupermarket.com shares have jumped so far in 2019 but Berenberg is less confident about the price comparison service’s prospects and cuts its rating to sell from hold. Broker estimates see 4-9% downside to consensus Ebit for FY19-20 and shares look overvalued.

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 392.7 (July high); 403.7 (100% Fibo)
• Support at 385.7 (76.4% Fibo); 374.5 (61.8% Fibo)
• RSI: 69.5

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,516 (76.4% Fibo); 3,596 (May high)
• Support at 3,403 (61.8% Fibo); 3,309 (50% Fibo)
• RSI: 72

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• EAB Group upgraded to reduce at Inderes; PT 2.50 Euros
• Norsk Hydro upgraded to buy at Citi

DOWNGRADES:

• Aena downgraded to underperform at RBC; PT 145 Euros
• Collector cut to sell at SEB Equities; Price Target 48 Kronor
• Compass Cut to Underperform at Bernstein; PT Set to 15 Pounds
• Continental downgraded to hold at Kepler Cheuvreux; PT 160 Euros
• Fraport downgraded to underperform at RBC; PT 65 Euros
• ICADE cut to hold at Kepler Cheuvreux; Price Target 80 Euros
• Moneysupermarket downgraded to sell at Berenberg
• Schibsted downgraded to hold at Kepler Cheuvreux; PT 352 Kroner

INITIATIONS:

• B&M European rated new outperform at Macquarie; PT 4.45 Pounds

MARKETS:

• MSCI Asia Pacific up 0.1%, Nikkei 225 down 0.2%
• S&P 500 up 0.5%, Dow up 0.2%, Nasdaq up 0.6%
• Euro up 0.09% at $1.1226
• Dollar Index down 0.12% at 97.27
• Yen up 0.25% at 111.45
• Brent up 0.4% at $70.7/bbl, WTI up 0.4% to $63.4/bbl
• LME 3m Copper up 0.8% at $6453.5/MT
• Gold spot up 0.3% at $1296.2/oz
• US 10Yr yield down 1bps at 2.49%

MAIN MACRO DATA (all times CET):

• 10:30am: (EC) April Sentix Investor Confidence, est. -2, prior -2.2

©2019 Bloomberg L.P.