Time to buy European banks, says SocGen

Societe Generale turned bullish on European banks in its latest Europe Equity Compass, saying it was time to buy as deflation fears recede.

The bank noted fear of deflation was back to an all-time high – even higher than after the Lehman collapse – with a plunge in oil prices and a massive yuan depreciation the main driver behind the fears.

However, both assets have recently rebounded and stabilised, leaving room for deflation fears to abate.

“On top of a much softer Fed and more aggressive ECB, stabilisation of the oil price and the CNY should push inflation prints higher by Q3. Receding fears of deflation would be a key driver for banks,” SocGen said.

In addition, it pointed out that the European banking sector credit default swap spread recently returned to a reasonable level, highlighting a lack of major concerns about balance sheets.

“This is an indispensable condition for a re-rating of banks stocks.”

SocGen suggested a number of ways to implement its bullish view on stocks.

It recommended investors go long core Eurozone and UK banks and short peripheral banks.

It noted the Spanish and investment banks are under the most earnings pressure, and said it was cautious on both.

“We are constructive on the wider banking sector, but only have real conviction on banks that have strong capital positions, have some degree of insulation against ECB-led margin pressure, and can offer re-rating potential. This pushes us to the core fixed rate Eurozone markets (France, Benelux) and the UK.”

Another way to play SocGen’s call on banks is to go long European commercial banks or short European investment banks.

“Going short European investment banks would be a nice way to hedge our long European commercial banks and manage the beta of portfolios. For a bottom-up perspective, we are not as bullish on investment banks, except for UBS.”

Other recommendations included going long European banks or European banks CDS, or going long global banks/short global consumer staples.

“The recent spike in deflation news flow has supported a record performance of global consumer staples (bond proxies) relative to global banks.”

SocGen’s top five ‘buy’ calls are BNP, Erste, ING, Lloyds and UBS. Its top five ‘sell’ calls are BBVA, Credit Suisse, Deutsche Bank, Nordea and Santander.

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