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  • 2011/05/26
  • 3 min
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European banks: When the leverage is low, the jewels stand out

With 90 analysts covering 700 stocks across 30 sectors, Crédit Agricole Cheuvreux is a leading equity broker in Europe. The banks team, which consists of 11 analysts, announces the publication of its latest sector report on European banks, which highlights the following key points:

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Play the winners:

  • Basel 3: only a few banks will come out winners of the new regulatory regime.
  • CA Cheuvreux has adjusted its Top Picks list: BNP Paribas and Danske Bank have been added to the list, which still comprises Crédit Suisse, Intesa SanPaulo and Julius Baer.

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Profits are normalising, revenues will replace lower provisions as the main profit driver:

  • Combined profits of CA Cheuvreux’s universe expected to be back to the 2006 levels in 2012E (ca. EUR100bn).
  • However, as revenues are more volatile and uncertain, earnings growth will depend on banks’ capacity to raise margins, but only a few countries will be able to do so.

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ROTE (Return On Tangible Equity) will suffer from the lower leverage

  • The ROTE for CA Cheuvreux’s coverage universe is expected to reach 13.6% in 2011E and 14.9% in 2012E. However, assuming a 10% CET1 under Basel 3, ROTE could decline to 10% and it would take 15% higher revenues to return to 15% (10% if CET1 is set at 9%).
  • This report also compares the ROTE of banks with that of utilities, another highly regulated industry: banks do not reach the high levels of ROTE of the utilities sector, generated partly thanks to the use of leverage. Unlike utilities, banks are not regulated on margins, and the best banks harbour the possibility to improve them.

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