- Stress tests helpful but do not change the medium-term outlook "We remain Neutral on the Banks sector in Europe overall and continue to recommend a long position in our Global Retail Banks basket (GSSBBKGL). The upcoming Stress tests should increase clarity, especially for the nonlisted sector, and are also likely to move concern away from the large Spanish banks (which in our view are well financed). Furthermore discussions to soften regulation – pushing out the time to implement Basel III and softening the requirements – would also be supportive in our view."
- Expect slow loan growth in Europe "However, despite the crisis financials still make up 24% of the market cap in Europe; only fractionally below the long-term average of 25%. The large near-term uplift in expected earnings for banks is driven by provisioning rather than loan growth. Declining provisions is obviously helpful (and provides a high level of viability) but beyond this we see weak loan growth especially for banks with domestic exposure."
- Valuation case for Banks is not compelling "Banks trade at a P/E relative of 67% (2012E) compared with an historical average of 75% – a small discount to where it has typically traded. But given the risks to the sector, uncertainty regarding pending regulatory
reform and that Greek sovereign debt fears have not fallen away, the sector should arguably be on more of a discount. Furthermore, it is not yielding more than other low growth sectors such as telecoms or utilities."
- We are long Global Banks versus short Domestic Banks "We continue to prefer banks with global exposure. Our European Global Retail Banks basket (GSSBBKGL) has outperformed Domestic European Banks (GSSBBKDE) by 12% since March 2010 and would have done better if BBVA and Santander were not in the basket. Our Banks team argues that
the Stress tests should move the focus away from Spanish banks where funding appears secure."
GoldmanSachs Europe Portfolio Strategy 20100713
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