Sell-off in banks has been overdone, Credit Suisse says

The recent 'sell-off' in the banking sector had been overdone, with high-yield spreads pricing in about a 70% possibility of a recession, which was too much, Credit Suisse said in a research report sent to clients.

Among the factors which were in banks´ favour on a 'tactical' basis was the fact that banks´ credit had lagged the sell-off in their shares, suggesting that had not been about credit-crisis concerns, the broker´s strategy team said.

To take note of too, the performance of banks´ shares remained correlated to the oil price, due to to their exposure to the energy sector and the correlation of oil with bond bond yields, strategist Andrew Garthwaite explained.

"Valuations are also supportive: European banks are pricing in a 50% chance of a crisis/economic recession, which we consider too high (with European banks trading at a 20-year low relative to US banks)," Andrew Garthwaite said.

As well, Garthwaite pointed out how net interest margins had held up well in those countries which were the earliest in adopting negative interest rates.

However, "[banks] are not yet an attractive long-term investment proposition," the Swiss broker said.

According to Garthwaite, global debt to gross domestic product was at an all-time high - and banks are directly and indirectly affected by the leverage cycle, banks´ betas are 'asymmetric' - with betas into market rallies lower than in sell-offs - and there were still significant regulatory, tax and litigation risks, as well as pressure on fee income.

Making matters worse, political risks in Europe remained high, posing a threat to banks.

Credit Suisse´s banks team´s top-picks were: Erste, Danske and Intesa. From a top down perspective, the broker said it would recommend focusing on lenders with "good cost control and attractive valuations", with Intesa, Danske and Lloyds screening well on their valuation models.

UK banks offered the best combination of a concentrated market structure, the ability to reprice assets and positive deposit rates, while French ones had the highest discount rate outside of Asia, the broker concluded.