Some interesting and fairly contrarian comments from Andrew Garthwaite at Credit Suisse. Garthwaite makes the argument in favor of U.S. banks (over European banks) based on the following 10 points:
- Economic growth momentum is improving in the U.S. relative to Europe.
- The move in the spread between U.S. and German bond yields suggests the de-rating of U.S. banks relative to European banks is now complete
- We already have seen the bulk of the dollar weakness.
- U.S. banks have de-leveraged more than their European peers and have lower loan-to-deposit ratios.
- U.S. bankruptcies are set to fall significantly.
- Regulation risk is declining in the U.S. relative to Europe. We expect US banks to increase dividends beginning in 1Q 2011.
- Lending conditions are consistent with good loan growth next year.
- U.S. housing risk is overstated. Valuation is at a record low (the housing affordability index is at an all-time high). The fact that roughly 70% of the U.S. mortgage market owned or guaranteed by the government makes the banks less sensitive to further deterioration in the housing market.
- Consolidation potential – This is particularly likely amongst the smaller banks.
- Valuation looks attractive. PPP at 5.5x - 24% below the historical average of 7.4x (that discount increases to 40% if we assume more benign write-downs in line with IMF projections).
Source: Credit Suisse