Following a number of months of outperformance of Subordinated versus Senior debt, and of Peripheral versus Core European issuers we are left with a somewhat undifferentiated RV picture for the sector which prompts the very common question - where do we see value for the remaining part of the year?
Overall, from a macro perspective we maintain our positive stance on EUR credit where high “all-in yields'' continue to drive demand and inflows, while improving macro and continuing disinflation represent a positive backdrop for a possible higher for longer scenario.
Fundamentally, European banks delivered solid 1Q24 results overall thanks to still-resilient revenues and benign cost of risk. As in 2023, the improvement in NIMs remains the main driver of better bottom lines, with Spanish banks continuing to outperform Core European names this quarter thanks to still increasing margins on assets. Also, EU banks reported a solid increase in capital throughout 2023 and YTD while funding and liquidity remain strong with gross issuance c.+4% YTD versus 2023 equivalent.
Despite being off the wides seen in early 2023 and a valuation gap to Non-Financial Corporates which is now closer to the long-term average for SP instruments (c.-10bp), we maintain a positive view on the EU banking sector because of the still attractive absolute levels compared to the recent tights registered in late 2021.
We confirm our preference for Senior Non-Preferred versus Senior Preferred Instruments and for Callable versus Non-Callable debt. Nonetheless, we believe that current levels offer an opportunity to reallocate in favor of higher quality credits with some of the large Core European and UK issuers now screening inexpensive versus historical relative valuations in our view.
With the above in mind, please click on the below PDF link for access to the full presentation with our single-name recommendations, spread levels and trade rationale.