UBS downgrades European banks on Brexit

UBS downgraded its position on European banks to ‘underweight’ from ‘neutral’ following the UK’s vote to leave the European Union and upgraded emerging market banks to ‘neutral’ from ‘underweight’ with an ‘overweight’ position in the US.

“While credit markets have remained relatively well behaved, following the UK vote, asset yields have fallen sharply, given market expectations of renewed policy intervention via further policy rate cuts and/or additional quantitative easing, suggesting more downside risk to sector revenues.”

According to UBS’s latest in-house banking survey, sentiment on the outlook for developed market banks has deteriorated. The proportion of respondents with a negative view rose to 27% from 7% in the previous survey, while respondents with a positive view fell to 33% from 43%, following falling asset yields and lower policy rate expectations that pose risks to margins and earnings.

UBS said the banking picture in DM has turned gloomy, with risk to loan growth and net income margin now heavily skewed to the downside.

In EM, however, the number of respondents with a negative fell to 38% from 44%.

UBS pointed out that earnings momentum in Europe is still the weakest globally. Over the last 12 months, it has cut its 2016 earnings per share estimate by 24.9% and the 2017 estimate by 26.5%.

“Given prospects of further top-line revenue pressure at a time when banks are already struggling to deliver on existing cost commitments, we see more downside risk to earnings estimates, as highlighted in our latest in-house banking survey.”

UBS remained ‘overweight’ US banks, highlighting a preference for regional banks over brokers and universal banks. It said that while US banks also face fundamental headwinds with delays in further rate hikes by the Fed not helping margins, they benefit from lower earnings risk and minimal balance sheet concerns than banks in other parts of the world.