SocGen downgrades European banks, reviews ratings on UK banks after Brexit

Banks in London took another beating on Monday as investors mulled over the implications of the UK’s decision to leave the European Union, with ratings downgrades across the board.

Societe Generale was among those issuing downgrades. It cut its stance on Royal Bank of Scotland to ‘sell’ from ‘hold’ and chopped the price target to 200p from 260p saying its lower level of profitability gives it less scope to absorb bumps in the road.

It kept its ‘buy’ recommendations on Lloyds, Barclays and HSBC, but slashed the price targets. It kept its ‘hold’ recommendation and 575p price target on Standard Chartered as its focus on Asia, Africa and the Middle East means it’s more insulated from the Brexit fallout.

SocGen said the UK was still one of its preferred regions within European banks, while investment banks in Spain remain some of its least preferred.

“Yes, the UK is the epicentre of the Brexit gyrations, but Brexit is a major issue for the rest of Europe. UK banks are reasonably well capitalised and have some decent businesses and are better able to deal with turbulence than banks in some other areas.”

Within the UK, SocGen kept its preference for Lloyds, but trimmed the target price to 70p from 98p, thanks to strong pre-provision profitability.

It kept its ‘buy’ rating on Barclays but slashed the price target to 185p from 245p, noting the higher quality UK business and non-sterling revenues. SocGen also retained its ‘buy’ on HSBC, saying it still expects a maintained dividend, but downgraded the price target to 510p from 630p.

SocGen downgraded its stance on the European banking sector to ‘neutral’ from ‘overweight’, saying it does not expect the sector to outperform in this politically and economically uncertain environment and awaits new triggers to activate its call again.

"A Bremain outcome would have probably kick-started a recovery for European banks. After the selloff last week, the sector is more than ever trading at value levels (price to book of 0.6x, 62% discount relative to the market), and it is now too late to be underweight."

Still, it kept its ‘overweight’ on European insurers pointing to an attractive valuation and noting that Brexit is not such a big threat to them.