Banking Turnaround Foreseen in Europe, Citigroup, MS Say

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Europe’s banks may be on the point of a turnaround as economic growth returns to the continent and the European Central Bank prepares to review the industry’s assets, Citigroup Inc. and Morgan Stanley said.

Banks in Europe are at an “inflection point” and “ripe” for increased return on capital, Citigroup said in an e-mailed report today, saying it was maintaining an overweight recommendation. Next year will be “pivotal” and banking shares may rally a median 14 percent versus 10 percent for the equity market as a whole, Morgan Stanley said in a report.

An ECB review of the balance sheets of about 130 banks, which began last month, “should serve to reduce the sector risk premium,” Citigroup analysts including Kinner Lakhani and Ronit Ghose said. The review “will probably prove more cathartic than the market fears” as banks front-load charges this quarter and at the start of 2014, said Morgan Stanley analysts led by Huw Van Steenis.

Europe’s banks have been forced to forsake dividends, boost capital and sell businesses as the continent’s sovereign-debt crisis ripped through balance sheets. A cleanup of assets continues at many firms as the ECB prepares to take over regulation of the industry.

BNP Paribas SA, France’s biggest bank, ING Groep NV of the Netherlands, Swiss bank UBS AG and UniCredit SpA of Italy were among firms Morgan Stanley most preferred. It raised Sweden’s Swedbank AB to overweight from equal-weight and Mediobanca SpA of Italy to equal-weight from underweight.

Italian Banks

French, Nordic and Swiss banks including BNP and Danske Bank A/S of Denmark are among the best placed, Citigroup said. ING is also favored, it said.

The Bloomberg Europe Banks & Financial Services Index climbed 15 percent this year, compared with a gain of 13 percent for the Stoxx Europe 600 Index.

Both Citigroup and Morgan Stanley said Italian banks were among those that may need to rebuild capital. Commercial real estate in the Netherlands will be a focus, while few surprises are expected in Spain, Morgan Stanley said.

Citigroup said it is concerned about capital risks and asset quality at Bank of Ireland and long-term profitability at Royal Bank of Scotland Group Plc.