Macquarie reiterates Lloyds as top-pick, downgrades Barclays

Looking out to 2017, analysts at Macquarie retained their "bullish" stance on European banks, arguing that multiples in the sector were not "stretched", earnings were likely to recover further and consensus expectations were undemanding.

However, their bias was for retail/commercial banks with cost and impairment improvements.

"We are cautious on optimistic revenue stories and would thus avoid the investment banks," the broker said in a research note published on 14 January but dated 12 January.

Despite the sector´s 40% rally from its June lows, valuation multiples for the Stoxx 600 banks index had only just returned to their normal historical levels, Macquarie said.

The relative price-to-earnings ratio stood at 81% that of the Stoxx 600, and the relative price-to-book value at 49%, with the latter reflecting the sector´s relative return on equity at 45%.

"Recent price gains have been dramatic in many cases but we don’t think they are excessive – or over," it said.

In Macquarie´s opinion, the key swing factors for European bank earnings in 2017 would be costs and impairments.

A return to historical trough-cycle levels for the former might add about 15% to the sector´s earnings and a reversion to those same levels for the latter about 10%.

"Against this, the revenue outlook is still tough. We see asset re-pricing keeping margins under pressure and we are sceptical on capital markets in view of an unspectacular 4Q and US rate headwinds to FICC, debt issuance and APAC," it cautioned.

Among the broker´s 'top buys' was Lloyds, which had underperformed the section thus far. Furthermore, the broker´s estimate of impairments in 2017 was 25% below consensus.

"Permanent TSB is another cheap, indirect play on better Brexit outcomes on a 40% TNAV discount and geared to Irish housing recovery," the broker added.

On investment banks, Macquarie said: "we don’t buy the revenue reflation argument, stocks have rallied hard and 4Q looks unexciting. We downgrade Credit Suisse to 'underperform' where it joins UBS and Deutsche Bank. After a 35% rally we are also lowering Barclays to 'neutral'.