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Oct. 11, 2016, 9:54 a.m. EDT

Go for the ‘world’s biggest contrarian trade’ and buy European banks now, Citi says

Strategists: Sector switches ‘from value trap to value trade’

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By Victor Reklaitis, MarketWatch


Getty Images
If all the damage is done, maybe it’s time to pick up the pieces.

You’ve probably heard that European banks aren’t doing so well, from Italy’s long-suffering lenders to Deutsche Bank with its potential $14 billion penalty.

But there is so much gloom around the sector that European banks now look good to Citi’s stock strategists.

These banks have gone “from value trap to value trade,” and it’s time to buy them, said Citi’s Jonathan Stubbs, Ayush Tambi and Nikhil Jadhav in a note dated Wednesday.

The strategists have given a range of reasons for their bullishness in their 15-page missive, starting with the fact that contrarians ought to like banks in the European Monetary Union, meaning countries that use the euro.

“EMU banks are the worst performing region/sector of the 285 we track in the last 10 years,” they wrote in their note, which offers the chart below. European banks are “the world’s biggest contrarian trade.”


Citi

Another reason to buy is because European banks are cheap on both absolute and relative terms, according to Citi. They gave the chart below showing price-to-book and relative price-to-book data.


Citi

The strategists acknowledged the sector’s fundamentals are mixed, and they also don’t see it attracting momentum traders.

“To move from value trap to value trade, risks need to reduce. We think that is happening,” they said.

“To become a momentum trade beyond that requires fundamental improvements. That is less clear.”

Read more: Deutsche Bank and 3 other ways Europe is giving investors heartburn

And see: Here’s why talk of an ECB taper hit a sore spot

The iShares MSCI Europe Financials ETF /zigman2/quotes/208947805/composite EUFN +1.60%  offers a way to bet broadly on continental banks, but Citi has named individual stocks to buy, including BBVA /zigman2/quotes/209653399/delayed ES:BBVA +0.15%   /zigman2/quotes/204078760/composite BBVA -0.36%  , Standard Chartered /zigman2/quotes/200125072/delayed UK:STAN +1.71%  , Danske Bank /zigman2/quotes/209678580/delayed DK:DANSKE +2.46%  , KBC /zigman2/quotes/209494285/delayed BE:KBC +0.64%  , Intesa /zigman2/quotes/206161760/delayed IT:ISP +1.22%  , BNP Paribas /zigman2/quotes/206351084/delayed FR:BNP -0.28%  and ING /zigman2/quotes/203351007/delayed NL:INGA +1.99%  .

This story was first published on Oct. 6, 2016.

/zigman2/quotes/208947805/composite
US : U.S.: Nasdaq
$ 19.02
+0.30 +1.60%
Volume: 743,393
March 1, 2021 4:00p
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/zigman2/quotes/209653399/delayed
ES : Spain: Madrid
4.61
+0.0070 +0.15%
Volume: 14.45M
March 1, 2021 5:38p
P/E Ratio
N/A
Dividend Yield
1.04%
Market Cap
€30.55 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/204078760/composite
US : U.S.: NYSE
$ 5.55
-0.02 -0.36%
Volume: 2.14M
March 1, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
4.14%
Market Cap
$37.09 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/200125072/delayed
UK : U.K.: London
470.00 p
+7.90 +1.71%
Volume: 10.04M
March 1, 2021 4:35p
P/E Ratio
56.09
Dividend Yield
1.37%
Market Cap
£14.56 billion
Rev. per Employee
£194,812
loading...
/zigman2/quotes/209678580/delayed
DK : Denmark: OMX
kr. 116.50
+2.80 +2.46%
Volume: 2.22M
March 1, 2021 4:59p
P/E Ratio
24.72
Dividend Yield
1.72%
Market Cap
kr.97.06 billion
Rev. per Employee
kr.6.11M
loading...
/zigman2/quotes/209494285/delayed
BE : Belgium: Euronext Brussels
60.00
+0.38 +0.64%
Volume: 612,844
March 1, 2021 5:38p
P/E Ratio
17.98
Dividend Yield
0.51%
Market Cap
€24.84 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/206161760/delayed
IT : Italy: Milan
2.16
+0.03 +1.22%
Volume: 107.61M
March 1, 2021 5:35p
P/E Ratio
10.78
Dividend Yield
1.65%
Market Cap
€41.41 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/206351084/delayed
FR : France: Euronext Paris
49.14
-0.14 -0.28%
Volume: 3.66M
March 1, 2021 5:37p
P/E Ratio
8.86
Dividend Yield
2.26%
Market Cap
€61.50 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/203351007/delayed
NL : Netherlands: Euronext Amsterdam
9.22
+0.18 +1.99%
Volume: 20.75M
March 1, 2021 5:35p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
€35.25 billion
Rev. per Employee
N/A
loading...

Victor Reklaitis is a London-based markets writer for MarketWatch. Follow him on Twitter @VicRek.

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