Credit Suisse sticks to 'small overweight' on European banks, Lloyds as 'top pick'

In a nutshell, they were "cheap", the analysts said, despite the risk of disruption which they assessed as being a "manageable challenge" for incumbent lenders.

For starters, lenders' price-to-book multiple was one standard deviation below the market's, as well as relative to US banks'.

On the past three occasions during which that had occurred, European banks had outperformed their US rivals, they explained.

Furthermore, their cost of equity should be nearer 9.0%, which when coupled with the investment bank's estimates for return on tangible equity meant that they were "very cheap".

Regarding the macroeconomic drivers behind the investment case, their shares were discounting GDP growth of around 1.5%, the sector tended to be among the most sensitive to inflation expectations and Treasury Inflation Protected Securities and the European Central Bank was still set to hike rates.

The latter might not happened if GDP growth fell below 1.0%, they said, but the analysts saw little chance of that occurring.

The reasons for that were that one-year futures commodity price rises had been much more muted, US GDP was expected to expand by around 3.5% and some offset from fiscal outlays in Europe were to be expected.

Their forecasts were calling for euro area interest rates to end 2024 at 1.5%, against the 1.0% currently priced in, and for the yield on Bunds to end 2022 at 0.60%.

Each additional percentage point on rates translated into roughly a 15% increase in banks' profits.

Credit Suisse's 'top picks' in the sector were Lloyds, UBS and BNP.