Citi positive on UK international banks
Against a disinflationary backdrop, the long-end of the of the US dollar and euro area interest rate curves have undergone what analysts terms a 'bull-flattening' since the start of 2010.
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As foreseen by analysts at Citi several years ago, lenders from the Benelux countries, Italy and Scandinavia outperformed over that time horizon.
Over longer time horizons, looking back at the past five or twenty years, French banks have also been among the best performers, but not this time around, “offering a catch-up opportunity,” the broker pointed out in a research report e-mailed to clients.
However, more recently, and as sovereign bond yields spiked, investors have been caught in a 'bear-steepening' environment, as short-term interest rates rise faster than those further out along the maturity spectrum.
When the US rate curve undergoes a bear-flatenning it is French, Nordic and Benelux lenders´ shares that outperform.
UK international and Spanish banks on the other hand have underperformed as the risk premium on assets from emerging markets increases in a higher US dollar and rates environment, Citi added.
In this interest rate cycle however, Citi strategists are more optimistic on Asia, given the higher current account surpluses among those countries in the region.
"Fundamentally, the Swiss and major UK International banks should benefit the most from positive earnings sensitivity in rising USD rates given their significant surplus USD deposit franchises."
Citi´s prefered stocks in the sector are UBS, StanChart and Credit Suisse.