JPMorgan cuts European banks 'overweight' against US banks to 'neutral'

(Sharecast News) - JPMorgan Cazenove said on Tuesday that it was remaining positive on European banks, moving from 'overweight' Europe versus US banks to 'neutral', considering the discount of just 16% for Europe to US banks today.

"We retain our positive view on the European banks sector following our initial assessment of the fiscal announcements across Europe, led by Germany and the EU," JPM said.

It noted that European banks are 17x leveraged and highly geared towards stronger macro and higher rates.

"We acknowledge that EPS upgrades are more limited at 3-4% per annum on average across the sector for 25-27E, but more importantly, cost of equity should decline from 12% today to 10%, i.e. price-to-earnings of 8x to circa 10x 2026."

JPM said the risk of European Central Bank rates falling below 1.5% has been reduced and hence banks' earnings are much safer today with investors clipping total yield of around 9% a year. As a result, JPM expects a continued PE re-rating.

"We also see the re-rating against US banks as now overdone and we move from OW Europe over US banks...to neutral considering the discount of just 16% discount for Europe to US banks today.

"In addition, we see implied cost of equity decline as a long-term thematic, although in the short term, we expect material volatility in share prices considering the strong circa 25% year-to-date performance, and to some extent, an over-estimation of EPS upgrades from stimulus."

JPM's top picks are Barclays, Deutsche Bank, Intesa, UBS, Societe Generale and NatWest.