UBS: Global bank stocks are entering a "golden window," with Europe, Japan and other areas potentially becoming undervalued.

UBS Group AG published a research report indicating that the global banking industry is showing strong investment potential in the current macroeconomic environment, especially bank stocks in regions such as Europe, the UK, Japan, and Brazil are highly favored. The bank pointed out that despite facing many challenges, the banking industry still has multiple supporting factors and there is room for valuation recovery. Macroeconomic Environment and Valuation Advantage The UBS Group AG strategist team, led by Andrew Garthwaite, believes that the banking industry currently has multiple advantages. Firstly, there will be significant support at the macro level: banks can serve as a hedge against the rise of populism, which often brings fewer immigrants, more domestic manufacturing, fiscal loosening, higher minimum wages, and protectionism, which will lead to rising bond yields, steepening yield curves, and benefit banks; for non-Bank of America Corp, a strong currency can make it a winner; loan growth in Europe is accelerating, with significant increases in corporate loans in Italy and Germany, and in terms of mortgage loans in Europe, 37% of banks report increased loan demand, and leverage for European households and businesses is at low levels. Secondly, the current bank stocks' price-earnings ratios are about 10% lower than normal market levels, but UBS Group AG believes that their valuation should be reassessed for several reasons: bank loan risks are much lower now, as observed in Sweden, where non-performing loans showed exceptional resilience during economic recessions; non-macro level adverse factors have weakened, banks as a whole do not need to deleverage, litigation and fines have decreased, industry disruption threats have lowered, and special tax risks have also decreased; the banking industry is in a phase of consolidation, with the first large-scale cross-border acquisitions in Europe in over a decade, and consolidation in markets such as the US and the UK; bank stocks are becoming a "new necessary consumer item", with a forecast total return (including buybacks) of 8.3% in Europe by 2025, and 7.2% in the US (dividend 2.2% + buyback 5%), making it the best sector in terms of total return and dividend combination across all industries. Favorable Tactical Factors From a tactical perspective, bank stocks are also attractive. Firstly, bank stocks are not excessively held, ranking ninth in terms of crowding, not significant. Secondly, earnings momentum is strong, ranking second in earnings revisions in Europe and fifth globally. Thirdly, globally, the banking industry's PMI new orders and pricing combination perform strongly. Key Banking Types to Watch UBS Group AG points out that the following types of banks are worth paying attention to: first, banks in the European, UK, Japanese, and Brazilian markets; second, retail banks, where compared to corporate loans, retail loans are less affected by disintermediation, with stronger growth in household loans, and AI and blockchain technology may bring more cost-cutting opportunities to retail banks; third, low-priced indirect emerging market bank stocks, such as Standard Chartered Bank (02888) and Banco Santander S.A. Sponsored ADR (SAN.US). Beware of Potential Risks Despite the optimistic outlook, UBS Group AG also warns investors to be wary of the following risks. 1) Credit spreads, historically, banks tend to underperform when credit spreads rise, but experiences in Sweden in 2022-2023 show that because banks did not engage in high-risk lending, a small increase in credit spreads did not lead to increased write-offs, breaking this traditional relationship. 2) Threat from stablecoins, although the current size of stablecoins is relatively small (about $240 billion, compared to the $7 trillion in the US money market fund), related regulations are still advancing, which may divert bank deposits and affect profit from payment system. 3) Loans to non-bank Financial Institutions, Inc., Bank of America Corp's loans to non-bank Financial Institutions, Inc. have grown far more than traditional loans since 2000, currently reaching $1.2 trillion, accounting for about 30% of Bank of America Corp's capital; however, UBS Group AG believes that due to better matching of asset and liability durations, the risks are relatively controllable.