European banking stocks ready for rebound, according to Barclays strategists

European banks are finally showing signs of recovery and investors should seek to reduce their bearish position in the besieged sector, according to Barclays strategists.

In a note released on Wednesday, Barclays 'European bank and European equities team said the stabilization of economic data and Eurozone bond yields could strengthen banks' relations, which show the most positive correlation with these markets. two indicators from all European sectors.

"The composite PMI of the euro area (purchasing managers index) is stabilizing and the main drivers of the national activity are well oriented," said the note.

He added that in the meantime, bond yields and inflation expectations are "trying to find a floor", which gives a boost to value stocks, those that trade at a price lower than that. of their fundamentals.

In addition, the Italian government "is showing some fiscal discipline" and the European Central Bank (ECB) has opened the door to further quantitative easing while "seeking to mitigate the negative effects of negative rates on banks". ".

European banks suffered a strong sell in the second quarter of 2019, losing more than 13% in the last three months and falling 18.64% over the past year.

However, they have started to rebound slightly in recent weeks, gaining 5% in the last 30 days. Although the European banking sector has reached an underweight consensus, Barclays maintains an equal weight.

Barclays strategists, headed by Emmanuel Cau, head of European equity strategy, also pointed out that banks' shares are currently cheap and under-owned. Third sector with the worst performance since the beginning of the year, many banks are trading at "a discount and a valuation offer close to the extreme extreme and an attractive dividend yield of 6%", added the note.

Combined with depressed valuations and the current bearish position of investors, this environment could lead to additional "under-hedging" of the purchase of securities sold short (when traders are banking on a loss in value) in the market. Hope to minimize losses if the price of the action increases.

The note pointed out, however, that "structural problems do not disappear", with profits remaining limited by the negative interest rate policy and trade tensions, Brexit – related problems and the fight against money laundering. money continuing to blur the prospects.

But badysts have identified several banks offering "quality at a reasonable price" and have overweighted Lloyds, Caixabank and ABN while remaining "skeptical about certain restructurings" involving Deutsche Bank, Standard Chartered, UBS and BNP Paribas.

The note suggested that Deutsche would have trouble getting the revenue it was looking for in a recent mbad strategic restructuring and wondered if the German lender might need to raise equity in the next 12 to 24 months.

"From our point of view, many investors simply think that the sector is more investable and see it as a valuable trap," said the note.

"Although we agree that the profitability of its medium-term business remains difficult, we believe that some of the macro winds that have compounded its recent underperformance are mitigating."