Global Banks 2 November 2018Contents
OUR THESIS IN PICTURES ........ 4
Executive summary .. 5
Sentiment fading but still positive .... 5
Views on fundamentals ....... 6
Views on valuations . 8
Investment strategy . 8
UBS in-house banking survey ....... 15
Sentiment fading again but still positive ..... 15
Positive outlook for developed markets ...... 15
EM outlook – sentiment deteriorating ........ 16
Macro views ........... 18
Macroeconomic issues still dominate ......... 18
Political risk18
Inflation and interest rates . 18
Regulatory and policy issues ........... 18
Competition .......... 19
Bad debts .. 19
Emerging market currency depreciation ..... 19
Euro-area sovereign debt uncertainties ...... 19
Views on fundamentals ..... 20
Loan growth expectations .. 20
NIM outlook .......... 21
Asset quality .......... 24
Earnings outlook .... 25
Trade war impact . 26
Potential fundamental implications26
Potential earnings impact ... 27
Views on valuations ........... 28
An under-performing year . 28
Fair value or cheap ........... 28
Philip Finch
Strategist
philip.finch@ubs
+44-20-7568 3456
Giovanna Rosa
Associate Analyst
giovanna.rosa@ubs
+55-11-3513 6568
Jason Napier, CFA
Analyst
jason.napier@ubs
+44-20-7568 5037
Saul Martinez
Analyst
saul.martinez@ubs
+1-212-713 2491
Brennan Hawken, CPA
Analyst
brennan.hawken@ubs
+1-212-713 9439
Brock Vandervliet
Analyst
brock.vandervliet@ubs
+1-212-713 2382
Daniele Brupbacher
Analyst
daniele.brupbacher@ubs
+41-44-239 1493
Shinichi Ina
Analyst
shinichi.ina@ubs
+81-3-5208 6227
May Yan
Analyst
may.yan@ubs
+852-2971 7157
Bob Kommers
Analyst
bob.kommers@ubs
+44-20-7567 6980
Global Banks 2 November 2018Global Banks
UBS Research THESIS MAP MOST FAVOURED LEAST FAVOURED
BB, BAP, CASA, Huntington, ING, JPM, Lloyds, Northern Trust, Sberbank, SMFG Allied, Handelsbanken, HSBC, NAB, StandChartered, BSAC, Texas,VTB, Westpac, YES
PIVOTAL QUESTIONS Q: How could a trade war impact banks
With the US-China trade war escalating, and our macro team estimating a potential 108bp hit to
global growth (click here), our UBS 3Q18 in-house banking survey looks at what this could mean for
banks. According to our survey, 50% of respondents believe the impact for banks would be indirect
via weaker loan growth arising from lower GDP growth while 22% expect it to be via higher cost of
equity arising from risk aversion. Our survey also indicates that the direct impact on bank earnings is
likely to be low-to-moderate (69%) or moderate (28%) with only 3% expecting a moderately high
impact (Hungary).
Q: Where are we in the cycle
The flatter yield curve, sluggish lending and muted capital markets activities suggest that US banks are
late in the cycle. Early expectations of the tax reform's second order effect appear to be too optimistic
with loan growth for the top 25 banks running at only 1.8%, and as highlighted in our downgrade of
M&A boutiques on cyclical concerns. Elsewhere, with macro growth continuing to disappoint, the rate
cycle in Eurozone is being pushed out, while in EM, weaker economic surprise indices alongside
deleveraging in China suggest the banking sector has yet to the start of a new cycle. (click here).
Q: Is M&A set to pick-up
In Europe, we expect consolidation to come (click here), potentially driven by weak revenues, cost
pressure, rising cost of risks and/or even banks missing targets. We believe European regulators are
also supportive of consolidation, even across borders. In the US, the raising of the SIFI threshold to
US$250bn (click here), together with the build-up of capital by some banks (notably mid-cap names),
and in Japan suggests we could see a pick-up in bank acquisitions (click here).
WHAT'S PRICED IN Current valuations suggest the market is expecting a c14% fall in earnings. Yet, in the current
3Q18 reporting season, we have started to see the return of positive earnings momentum especially
for banks in developed markets.
UBS VIEW Following the recent sell-off, we think global banks' risk/reward profile is attractive: We have
preference for DM over EM being overweight banks in Japan and neutral those in the US and Europe.
The pick-up in earnings momentum has been notable in DM with 2018 EPS upgrade/downgrade ratio
at 1.6x while that for EM has been at 0.75x.
EVIDENCE EM banks: where are we in the cycle
Source: UBS estimates
India
Indonesia Thailand
Brazil Peru
Chile Colombia
Czech Rep
Mexico
Poland
South Africa Russia
Turkey China
Hungary
Hong Kong Philippines
Singapore
Early
Late
Malaysia
Korea
Global Banks 2 November 2018Global Banks UBS Research
OUR THESIS IN PICTURES return
Our latest in-house banking survey shows sentiment
towards the banking sector fading, although still
positively skewed
Although UBS banks analysts have a net positive view on
the banking outlook, it has fallen in the last quarters
Earnings momentum has started to pick-up with the
ratio of earnings upgrades to downgrades frequency at
1.2x over the past month
Based on consensus 1-yr forward PE estimates, global
banks are now trading at 2 SD below its historical mean
Sources for exhibits above: UBS, UBS Evidence Lab, I/B/E/S MSCI Aggregates, Datastream
0%
10%
20%
30%
40%
50%
Very cautiousSlightly
cautious
NeutralSlightly bullishVery bullish
Currently view on the outlook for bank sector
Jun-2018Latest
-30
-20
-101030
Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Lat
est
UBS net view on the banking outlook
PositiveNegativeNet positive
1.6
0.8
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
DMEMGlobal
Frequency of changes to 2018 EPS estimates
8.6
9.1
9.6
10.1
10.6
11.1
11.6
12.1
No
v-1Jan
-14
Ma
r-1Ma
y-1Jul
-14
Sep
-14
No
v-1Jan
-15
Ma
r-1Ma
y-1Jul
-15
Sep
-15
No
v-1Jan
-16
Ma
r-1Ma
y-1Jul
-16
Sep
-16
No
v-1Jan
-17
Ma
r-1Ma
y-1Jul
-17
Sep
-17
No
v-1Jan
-18
Ma
r-1Ma
y-1Jul
-18
Sep
-18
Global banks: consensus 1-yr forward PE estimates
Current (9.10)Average (10.54)+2SD-2SD。