Undervaluation+macroeconomic benefits support UBS continues to be optimistic about bank stocks: it is expected to usher in a good opportunity to revalue

The Zhitong Finance App learned that UBS recently released a research report saying that the bank has been overallocating bank stocks for a long time and continues to maintain this position strategically. The bank pointed out that bank stocks have the following supporting factors, but as always, it is necessary to select the right regions and individual stocks.

1. Macroscopic level

(1) Hedging the rise of populism: UBS said that one of its biggest concerns is that populism has led to increasingly irresponsible finances (last year was the first time in 120 years that all ruling parties in major developed countries lost political power or parliamentary majorities). The bank estimates that to stabilize the ratio of US government debt to GDP, fiscal austerity is needed to account for 3% of GDP. Banks, on the other hand, perform better than other industries when bond yields rise (they are the second-best performing sector when the yield on inflation-protected bonds rises) — the performance of bank stocks is closely related to the steeper yield curve.

(2) Strong currencies in Europe/the United Kingdom and Japan: Bank stocks are one of the best performing industries when the euro or yen appreciates. While the dollar weakened, emerging market banks performed well. UBS said it is currently still bearish on the US dollar.

(3) Recovery in private sector loan growth: European private sector leverage levels are abnormally low, but are recovering significantly (particularly corporate loans in France and Italy). UBS's macro model shows that according to PMI, German treasury yields, and the valuation of the euro, European bank stocks are currently in line with fair value. However, the bank predicts that PMI and the euro will strengthen further, and British and Bank of Japan stocks appear cheaper under the same variables.

2. The valuation has taken into account the significant economic slowdown

In Europe and the US, the price-earnings ratio (P/E) of bank stocks is about 10% below their long-term average. UBS believes that in Europe, 11.6% of the cost of equity is too high. Compared to the US (8.8%), it should be at most 10%. Achieving the roughly 10-14% reduction in earnings per share (EPS) that has been included would require a 20 basis point increase in the default loss rate or a reduction in interest rates below 1% — both of which require a serious economic slowdown, which seems unlikely. Since Liberation Day, UBS has maintained global GDP growth forecasts of 2.9% and 2.8% for 2025 and 2026.

3. Reasons why bank stocks should be revalued

(1) Banks are more able to withstand pressure during this round of recession: The reasons include stress tests, high capital requirements for high-risk loans, and strict supervision, etc., which led to banks not carrying out high-risk loans. Sweden's experience shows that during the economic recession (GDP fell 2.4% and housing prices fell 12.5% from the third quarter of 2022 to the first quarter of 2024), there was no significant increase in non-performing loans; instead, bank stocks performed better than the market.

(2) Non-macro headwinds have weakened markedly: for example, deleveraging has almost been completed (in fact, Basel III is being relaxed); lawsuits and fines have been reduced because banks are no longer criticized for their macroeconomic background (unlike after the financial crisis), and their risk control has improved dramatically.

(3) Reduced risk of disruption: For example, three years ago, the market was concerned about the impact of emerging technology on the banking industry, but now these “disruptors” are facing stricter regulation, and some have been acquired by traditional banks.

(4) Accelerated mergers and acquisitions: Many regions have significantly accelerated the pace of integration.

(5) Banks have become “new consumer necessities”: Currently, most traditional consumer goods industries have been abnormally impacted, and banks are showing stability.

Among all major industries, banks have the best combination of yield and earnings per share growth (8.3% in Europe and 7.2% in the US), according to UBS.

On a tactical level, UBS said (1) the banking sector is not overcrowded. According to the bank's congestion data, the banking sector ranked 8th out of 29 industries in the world and 9th in Europe. (2) Profit expectations were revised for the better. In the bank's European score card, the banking sector ranked 2nd in terms of profit correction and ranked 5th globally (27 industries in total). (3) Not seriously overbought. The bank pointed out that the current degree of overbuying in the banking sector is 1 standard deviation. At this level, bank stocks usually outperform the market in two-thirds of the time. (4) The banking sector performed best in the global PMI new order and payment price index.

However, UBS added that August and September were the worst months for market performance in history. The bank is expected to consolidate in the short term, but still maintain the MSCI AC World Index target of 960 points at the end of the year.

UBS said its global banking research team recommended the following banks:

Europe/UK: BAWAG (BAWAY.US), Dutch International Group (ING.US), Standard Chartered Bank, Barclays Bank (BCS.US), Intesa (ISNPY.US);

US: First Capital Credit (COF.US), Citizens Financial (CFG.US), KeyCorp (KEY.US), Cinda Financial (WTFC.US), Webster Finance (WBS.US), SouthState (SSB.US);

Other regions: Bradesco (Brazil), Piraeus (Greece).

UBS explained that its top-down analysis criteria are: (1) Focus on countries where interest rates are nearing the end of the cycle of interest rate cuts (such as Europe and Japan), or countries where interest rates are abnormally high and are expected to cut interest rates (such as Brazil). (2) Banks that focus on countries with strong currencies (such as Europe/the United Kingdom and Japan). (3) Focus on the countries that performed well in their score cards (scoring indicators include valuation, customer leverage, and housing valuation): South Africa, Italy, Spain, the United Kingdom, and Indonesia scored the highest.

According to UBS, the preferences of its global equity strategy team are:

(1) Retail banks: Europe such as ABN AMRO, NatWest, Intesa;

(2) Exposure to some emerging markets: Due to the weakening of the US dollar and the bank's expectation that the Federal Reserve will cut interest rates by 1 percentage point by the end of 2025, it is overbalanced by Bank of Brazil and Standard Chartered Bank;

(3) US investment banks: such as JPMorgan Chase (JPM.US);

(4) Bank of Japan: Although the bank is not covered, a top-down analysis shows that it is very attractive.

According to UBS, the reasons for its weak preference for Bank of America include: (1) domestic demand in the US is expected to slow sharply from the second quarter to the fourth quarter of 2025 (the year-on-year growth rate falls from 2.3% to 0.5%); (2) interest rates may decline faster than market expectations (the Fed cuts interest rates by 1 percentage point by the end of the year, and the market is expected to be 50 basis points); (3) The weak US dollar is relatively unfavorable (because banks are less internationalized than S&P stocks); (4) Bank of America's share capital costs are not as attractive as those in Europe, where the only support is deregulation and deregulation Overcapitalization. The bank's US research team predicts that if capital requirements for global systemically important banks (GSIB) are lowered by 100 basis points, it will increase ROTCE (return on tangible equity) by about 140 basis points.

It is worth mentioning that UBS said that banks that have screened the market consensus as “sell” but have an upward trend in profit and were rated as “bought” by the bank include: National Bank of Canada, Abu Dhabi First Bank, and ABN AMRO.