Credit Suisse positive on European banks, including Lloyds

Analysts at Credit Suisse sounded a positive note on European banks, telling clients earnings upgrades driven by revenue growth should see the group re-rate and that lenders' shares were pricing in only modest interest rate increases.

"We think the best way to gain exposure to rising rates is through banks, which are priced for only 25-30bp higher rates," they said.

In particular, the analysts expressed a preference for shares of UBS (target price: 22 Swiss francs), Lloyds (target price: 85p), Danske Bank (target price: 27 Danish Kronor), Natixis (target price: €8.0) and Santander (target price: €6.50), all of whose shares they rated at 'outperform'.

"Our preferred names are a mix of capital return stories, with > 6.0% total yield, and banks benefiting from benign asset-gathering trends, driving the top-line and enhancing capital generation, and with a high level of visibility."

Credit Suisse also highlighted the possibility that the regulatory outlook could improve, with EU politicians likely to water-down the Basel Fur proposals, and that capital returns might surprise to the upside.

"We think capital returns could surprise investors positively as EU banks' average 2017 payout ratio of c.54% lags the US banks at c.97% and gross capital generation could improve by c.40bp to almost 150bp/year in the next three years versus 2015-17, driven by fee growth (less capital intensive), lower litigation and low OPEX growth."