The cheapness of European banks is overstated by traditionalvaluation methods once new regulatory rules are taken intoaccount, and investors need to rely on stock-picking to findrelative value within the sector, analysts at JPMorgan say.
While the sector looks cheap on both a price-to-earnings anda price-to-book value, valuations are not attractive in Europeanbanking as a whole, as these measures do not take into accountbanks' leverage, they write in a note.
"We believe banks on a sector basis are not particularlycheap... However, we see material risk-reward opportunities asvaluation gaps between stocks are quite material and hence thereis relative value within the banking sector."
The bank's top picks include UBS, Deutsche Bank, Societe Generale, UniCredit,Caixabank, Nordea and Danske, asJPMorgan takes the view that "the market is not yet pricing inthe improved capital structure, funding profile and 'real cashflow' generation of some of the Eurobanks."
A cautious outlook for emerging markets prompts JPMorgan todowngrade HSBC to 'neutral' from 'overweight'.
However, Santander is upgraded to 'neutral' from'underweight', "despite its material EM exposure due tounderperformance against peers and Eurobanks in the past threemonths, some stabilization in Brazil and a more stable andpredictable Spanish domestic banking environment."
Reuters messagingrm://alistair.smout.thomsonreuters.com@reuters.net