Deutsche Bank's Top 9 European Banks To Put In Your Portfolio
European banks and insurers were hit hard not only by the spending changes caused by the pandemic, but also the regulations that forced them to cut or remove dividend payments, in addition to record low interest rates that decreased lending profitability. However, when the first COVID-19 vaccine candidates emerged, markets witnessed a surge. The MSCI Global Value index, a basket of cyclical stocks, gained 15.2% in the fourth quarter, compared to the 12.4% gains in the corresponding growth index.
European insurers are likely winners in this rejuvenation of the financial sector, according to Deutsche Bank, which says there will be a "return to well-underpinned dividends," according to research analyst Oliver Steel.
"The sector still trades 7%-8% cheaper than it did twelve months ago (on PE and dividend yield metrics respectively); and on a relative basis the gap is even wider," the note said.
"The sector currently trades on a 12-month forward PE and dividend yield of 10.8x and 5.7% respectively, which are respectively a little above the mid-point of the long-term range for the PE (9.5x-11.5x in normal markets) and at the cheaper end for the yield (4%-6%)," it added.
These are Deutsche Bank's top picks from the European financials universe:
1. Scorr - Symbol (SCR.EPA)
Current Price: €27.66
Price Target: €36.00
2. Aviva - Symbol (AV.LON)
Current Price: 343.30p
Price Target: 425.00p
"The shares are sensitive to UK political risk and to market risk (being negatively affected by lower swap rates and higher credit spreads / defaults). Other downside risks include lower-than-expected proceeds from potential disposals, failure to execute on disposals, a lower capital return than expected (perhaps reflecting further provisions or a preference for acquisitions) or a delay to any capital return," the note said.
3. Prudential - Symbol (PRU.LON)
Current Price: 1443.00p
Price Target: 1510.00p
"The group's US valuation (<10% of our valuation) is sensitive to investment markets – with higher US corporate spreads, increased defaults and lower US bond yields in particular representing a negative to the solvency ratio. Other downside risks include prolonged financial and economic impacts in Asia (and the US) from Covid- 19, lower Asian growth and continued political unrest or financial fallout from the HK security law (where the group is now regulated). Downside risks also include the possibility of further dilution to the US value if new equity is raised at the proposed minority IPO or that a minority IPO is not delivered," the note said.
4. Generali - Symbol (G.BIT)
Current Price: €14.26
Price Target: €17.00
5. Allianz - Symbol (ALV.ETR)
Current Price: €203.70
Price Target: €230
"Key downside risks: negative surprise on capital management actions (including poor M&A activity), a significant or prolonged downturn in the non-life pricing cycle (particularly longer tailed liability lines), an inability to deliver on operational improvement projects (particularly in the P&C business), negative flow and margin developments at PIMCO, adverse financial market developments (particularly in relation to the impact on solvency and/or dividend paying ability and given Allianz, like other insurers has arguably moved up the risk curve in light of the lower for longer interest rate environment), the potential inadequacy of prior-year non-life loss reserves (especially in the US), and regulatory uncertainties," the note said.
6. AXA - Symbol (CS.EPA)
Current Price: €20.13
Price Target: €24.5
7. Coface SA - Symbol (COFA.PA)
Current Price: €8.34
Price Target: €10.20
"Key inputs include: an over-the-cycle combined ratio of 80% and an investment return of 1.5%. We apply a cost of equity of 11.0% which we adjust for two factors: (a) an above-average 'franchise score' (3.1 in Coface's case) which increases our valuation by 1.5% and (b) a market-related stress test which has a c.10% negative impact reflecting Coface's below-average asset risk.
"Key downside risks relate to: despite improved underwriting/risk management, the group remains vulnerable to a financial/economic crisis - which could lead to share price weakness and potential pressure on capital and dividend. We also note that even just fears of a new (or prolonged) crisis could drive further share price volatility. Other downside risks include: worse-than-expected execution of newly announced strategic plan (from both a top-line and bottom-line perspective), capital requirements weakening more quickly than expected, and adverse developments more broadly, particularly in Emerging Markets," the note said.
8. Legal & General - Symbol (LGEN.LON)
Current Price: 270.40p
Price Target: 300.00p
"The group's solvency ratio is geared on the downside to lower bond yields, equity markets and higher corporate bond defaults - all possible under an extended lockdown. As a largely domestic UK business, it is particularly sensitive to UK economic and political risk, especially to anything that could impinge on the value of its UK infrastructure investments or credit exposure. Both future EPS and dividend growth targets could be vulnerable in the event of a further solvency ratio decline," the note said.
9. Hannover Re - Symbol (HNR1.ETR)
Current Price: €134.00
Price Target: €160.00