Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 10 February 2014 at 9:56 GMT

Quant Corner: Upcoming exam for Europeans banks

Head of Equity Strategy / Saxo Bank

• Banks under pressure as ECB ramps up scrutiny
• Barclays cost-cutting sets up base for better 2014
• SocGen stock undervalued, Q4 upside surprise on cards

By Peter Garnry

This week Barclays (Tuesday), Societe Generale (Wednesday), BNP Paribas (Thursday), Lloyds Banking Group (Thursday) and Commerzbank (Thursday) will report fourth-quarter and annual results, which will all be under extra scrutiny as the ECB's Asset Quality Review programme is coming closer. ECB's AQR will be the central focus this year and the overseer of the Single Supervisory Mechanism Danièle Nouy's comments today in the Financial Times that weak banks should die has lit a fire beneath a very fragile topic among European political circles.

Barclays is undervalued

All five major banks have had positive views for a while and our model maintains these views going into the new week (see attached PDF). The first bank to report is Barclays on Tuesday and while the UK bank has had a bumpy ride the last year (see chart), many hurdles have cleared as well and 2014 could end up being a good year for Barclays.

Barclay's share price the past year

Barclays share price the past year
Source: Saxo Bank

Last year's rights issue and effective cost cutting have restored the balance sheet and provided the foundation for tailwind in operating earnings. Barclays is currently trading at a large valuation discount but that should diminish throughout the year as the economy improves and investors recognise that the balance sheet capitalised enough in relation to the risk-weighted assets.


Barclays is hoping to enjoy a better ride in 2014. Photo: wcjohnston \ Thinkstock

The French banks to be key

On Wednesday and Thursday the two major French banks, Societe Generale and BNP Paribas, will report earnings respectively and those will prove to be key for the European banking industry. French banks have long be regarded as the weak part of the chain but the Q3 results showed that costs were under control and revenue actually rose from a year ago. Our model is especially positive on Societe Generale indicating that the stock is undervalued based on fundamentals and with recent positive price action, the stock could surprise to the upside on the Q4 results.

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Peter Garnry Peter Garnry
Barclays have chosen to release 2013 statutory pretax figures today (10:00 GMT) coming out at GBP 2.9 billion and adjusted pretax profits of GBP 5.2 billion. The stock was down following the release but has now fully recovered the losses.


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