European banks represent the world's biggest contrarian trade -Citi

LONDON, Sept 19 (Reuters) - Buying European bank stocks would be the world'sbiggest contrarian trade, Citi analysts said, adding they expect both returnsand asset quality to improve next year.

Banks in the economic and monetary union in Europe are the worst performingsector over the past decade among the 285 sectors which Citi tracks globally.

The U.S. investment bank stopped short of recommending an outright "buy" onthe sector, given that banks still face headwinds from low inflation and lowinterest rates while earnings expectations remain under pressure.

"History says 'Buy', but our key message is do not 'Underweight' thesector," said Citi analysts, led by Jonathan Stubbs, in a note to clients.

Danske Bank, Standard Chartered and BBVA arethe U.S. broker's preferred picks, while it counts HSBC among its lesspreferred stocks.

Banks globally have been on the backfoot since the 2008 crisis. Citi notedthat emerging markets are the only region in which banks currently trade abovetheir book value.

European banks, down 22.6 percent this year, currently trade atabout 0.7 times book value while Japanese banks, at about 0.5 times, are theworld's cheapest, according to Thomson Reuters data. (Reporting by Vikram Subhedar; Editing by Sudip Kar-Gupta)