Low valuation + macro bullish blessing UBS continues to be bullish on bank stocks: expected to usher in a good opportunity for revaluation.

UBS Group AG recently released a research report stating that the bank has been overweight on bank stocks for a long time and continues to maintain this position strategically. The bank pointed out that there are supporting factors for bank stocks, but it is important to choose the right regions and individual stocks. 1. Macro level (1) Hedging the rise of populism: UBS Group AG expressed that one of the macro issues they are most concerned about is that populism is leading to increasingly irresponsible fiscal policies (last year was the first time in 120 years that ruling parties in all major developed countries lost power or parliamentary majority seats). The bank estimates that to stabilize the ratio of US government debt to GDP, fiscal tightening of 3% of GDP is needed. Banks perform better relative to other industries when bond yields rise (they are the second best performing industry when inflation-protected bond yields rise) - the performance of bank stocks is closely related to the steepening of the yield curve. (2) Strong currency in Europe/UK and Japan: Bank stocks perform best when the euro or yen appreciates. Emerging market banks perform well when the US dollar weakens. UBS Group AG stated that they are still bearish on the US dollar. (3) Recovery in private sector lending: Private sector leverage levels in Europe are unusually low but are showing a significant recovery (especially in business loans in France and Italy). UBS Group AG's macro model shows that European bank stocks are currently fairly valued based on PMI, German government bond yields, and euro valuations. However, the bank predicts that PMI and the euro will further strengthen, making UK and Japanese bank stocks look cheaper under the same variables. 2. Valuation has factored in significant economic slowdown In Europe and the US, bank stocks' price-to-earnings ratio (P/E) is about 10% lower than their long-term average. UBS Group AG believes that in Europe, a 11.6% cost of equity is too high compared to the US (8.8%) and should be at most 10%. Achieving the already factored in 10-14% earnings per share (EPS) reduction will require a 20 basis point increase in default loss rates or a decrease in interest rates to below 1% - both of which require a severe economic slowdown, which seems unlikely. Since "liberation day", UBS Group AG has maintained its 2025 and 2026 global GDP growth rate expectations at 2.9% and 2.8% respectively. 3. Reasons why bank stocks should be reevaluated (1) Banks have shown greater resilience in this recession: reasons include stress tests, high capital requirements for risky loans, and strict regulations, leading to banks not engaging in high-risk lending. The Swedish experience shows that during an economic downturn (GDP decline of 2.4% and a 12.5% drop in house prices from the third quarter of 2022 to the first quarter of 2024), non-performing loans did not increase significantly, and bank stocks performed better than the overall market. (2) Non-macro headwinds significantly weaken: for example, deleveraging is basically complete (in fact, Basel III regulations are being relaxed); litigation and fines are decreasing because banks are no longer criticized for macroeconomic backgrounds (unlike after the financial crisis), and their risk control has significantly improved. (3) Disruption risks are decreasing: three years ago, the market was concerned about the impact of emerging technology on the banking industry, but now these "disruptors" are facing stricter regulations, and some have been acquired by traditional banks. (4) Accelerated mergers and acquisitions: integration has noticeably accelerated in multiple regions. (5) Banks have become a "new consumer necessity": while most traditional consumer goods industries are facing unusual challenges, banks are showing stability. UBS Group AG stated that among all major industries, banks have the best combination of return on equity and earnings per share growth (Europe's total return on equity is 8.3%, and the US total return on equity is 7.2%). On a tactical level, UBS Group AG stated that (1) the banking sector is not overly crowded. According to the bank's crowding data, the banking sector ranks 8th out of 29 industries globally and 9th in Europe. (2) Profit expectations are improving. In the bank's European scorecard, the banking sector ranks 2nd in earnings revisions, and globally ranks 5th out of 27 industries. (3) Not severely overbought. The bank pointed out that the banking sector is overbought by one standard deviation, and at this level, bank stocks tend to outperform the market two-thirds of the time. (4) The banking sector performs best in the global PMI new orders and payment price index. However, UBS Group AG added that August and September are historically the worst performing months in the market. The bank expects consolidation in the short term, but still maintains its year-end target for the MSCI AC World Index at 960 points. UBS Group AG stated that its global banking research team recommends the following banks: Europe/UK: BAWAG (BAWAY.US), ING Groep NV Sponsored ADR (ING.US), Standard Chartered Bank, Barclays PLC Sponsored ADR (BCS.US), Intesa (ISNPY.US); US: First Capital, Inc. Credit (COF.US), Citizens Financial (CFG.US), KeyCorp (KEY.US), Wintrust Financial Corporation (WTFC.US), Webster Financial Corporation (WBS.US), SouthState (SSB.US); Other regions: Bradesco (Brazil), Piraeus (Greece). UBS Group AG explained that their top-down analysis criteria are: (1) focusing on countries where interest rates are nearing the end of easing cycles (such as Europe, Japan) or at unusually high levels and expected to ease (such as Brazil). (2) Focus on banks in countries with strong currencies (such as Europe/UK and Japan). (3) Focus on countries performing well in their scorecards (score indicators include valuation, customer leverage, and housing valuation): South Africa, Italy, Spain, UK, and Indonesia scored the highest. UBS Group AG stated that their global equities strategy team preferences are: (1) Retail banks: in Europe such as ABN AMRO, NatWest, Intesa; (2) Partial exposure to emerging markets: due to the weakening US dollar and UBS Group AG's expectation that the Fed will cut rates by 1 percentage point by the end of 2025, they are overweight Brazilian banks and Standard Chartered Bank; (3) US investment banks: such as JPMorgan Chase (JPM.US); (4) Japanese banks: although not covered by the bank, the top-down analysis shows they are very attractive. UBS Group AG stated that the reasons for their weaker preference for Bank of America Corp include: (1) expected sharp slowdown in US domestic demand from the second quarter to the fourth quarter of 2025 (y-o-y growth from 2.3% to 0.5%); (2) interest rates may decline faster than market expectations (the Fed is expected to cut rates by 100 basis points by the end of the year, while the market expects 50 basis points); (3) a weak US dollar is relatively disadvantageous (as banks are less internationalized than S&P component companies); (4) Bank of America Corp's cost of equity is less attractive compared to Europe, with the only support being regulatory relaxation and excess capital. The bank's US research team expects that if capital requirements for globally systemically important banks (GSIBs) are lowered by 100 basis points, it will result in approximately a 140 basis points increase in ROTCE (return on tangible common equity). It is worth mentioning that UBS Group AG stated that their screening has identified banks with a market consensus "sell" rating but with a trend of profit upgrades, and rated as "buy" by the bank, including: National Bankshares, Inc. of Canada, First Bank of Abu Dhabi, ABN AMRO.