Europe’s investment-banking-exposed stocks are cheap, as the current levels of revenues are sustainable and cost discipline at the industry level is improving, note Deutsche analysts
Matt Spick and Bilal Hafeez of Deutsche Bank in their research report titled: “European Investment Banks” are most upbeat on Advisory and Underwriting.
Europe’s Investment Banks: Cheap valuations
The Deutsche Bank analysts note after several years of declining revenues, current implied valuations of European investment banking divisions are too low. The analysts believe there is a durable level of demand for advisory, issuance and trading services, with the banks already are on the right track on costs.
Considering European investment banking divisions are valued well below TBV, the Deutsche analysts anticipate long-term value in the industry.
The analysts highlight that the future will not be universal bank dominated and suggest Barclays PLC (NYSE:BCS) (LON:BARC) and Credit Suisse Group AG (ADR) (NYSE:CS) as candidates to play this theme.
The analysts believe Barclays’ implied valuation of the core investment bank plus non-core at zero is unwarranted, clearly underpinning the analysts’ view of the bank as too cheap. The analysts hence assigned ‘Buy’ rating on Barclays by pegging the target price at GBP2.85:
Turning their focus on Credit Suisse Group AG (ADR) (NYSE:CS), Matt Spick and team point out that its pure play private banking or asset management businesses is worth CHF 29 per share. The analysts note this would leave CHF 3 per share from Credit Suisse’s current share price for the investment bank, thus effectively putting a minimal valuation on the investment bank. The Deutsche analysts assigned ‘Buy’ rating on Credit Suisse with a target price of CHF 31.
The following table depicts key valuation metrics across Deutsche Bank’s coverage of universe of capital-market-sensitive banks:
Upbeat on advisory and underwriting
Matt Spick and team strike the most upbeat note on Advisory and Underwriting. In the following table, the analysts capture the strongest correlations between advisory and underwriting:
In the report the Deutsche analysts have also answered three key questions for the investment banking industry. As regards the query whether investment banking earnings are currently cyclically depressed, the analysts answered in the negative saying there is no evidence of cyclically depressed earnings. Moreover, the analysts point out that the investment banks have made some progress on costs by improving their cost control. As regards the query which business models are proving successful in the post-crisis era, the analysts conclude that a variety of business models, both universal and narrow, can thrive.