Citi upgrades European banks to 'overweight'

It's been a turbulent couple of weeks for the banking sector as investors worried Deutsche Bank wouldn’t be able to cough up its $14bn fine to the US Department of Justice, but Citigroup provided some cheer for the sector by upgrading European banks to ‘overweight’ from ‘neutral’.

In its latest equity strategy note, Citi pointed out that eurozone banks are the worst performing region/sector of the 285 it tracks in the last 10 years, making them the world’s “biggest contrarian position”.

Citi said that while it acknowledges fundamental headwinds such as low interest rates and regulatory risks, there are also signs of improvement such as the credit cycle, loan growth and improving returns.

“European banks are back to 2008-09 and 2011-12 levels on several valuation metrics, i.e. previous levels of system risk. European banks have never traded this cheap relative to US banks, the gap between European bank credit and equity is at system risk wides and banks have been sharply de-rated in the last year on a DY relative basis.

“The sector is better priced for disappointments and not priced for reducing risks, in our view.”

However, Citi wasn’t bullish across the board, as it remained cautious on UK domestic banks.

The bank downgraded telecoms to ‘neutral’ to fund the move on banks, but said it continues to prefer telecoms to utilities.

Citi has buy ratings on BBVA, Standard Chartered, Danske, KBC, Intesa, BNP and ING.