Madrid: Investors should "steer clear" of European investment banks as fourth quarter earnings show deteriorating operating results and they fail to reduce bonuses, Sanford C. Bernstein analysts said.
Bernstein expects fourth-quarter earnings will reveal a 36 per cent quarter-on-quarter drop in underlying operating results for European investment banks, London-based analysts Dirk Hoffmann-Becking and Sabyasachi Mohanty said in a report dated Monday. They also cut 2010 earnings per share estimates for most of the banks they cover, saying they won't use political pressure on bonuses to reduce staff payouts.
The Bernstein analysts say they doubt 2010 will be a "great year" for investing in lenders overall as competition erodes revenue opportunities, stimulus programmes are withdrawn and tighter regulation hurts investment banks. Shareholders may have to "carry the baby" as investment banks are unlikely to offset revenue declines with lower bonuses, the analysts wrote.
Current risk
"Going into the quarter, we would use the current risk rally to lighten up on the investment banks," they said.
Hoffmann-Becking and Mohanty said they prefer commercial banks to investment banks.
Among commercial banks, they prefer Societe Generale SA and BNP Paribas SA and are "constructive" on Barclays Plc given its "still low" valuation. They are "very concerned" about Credit Agricole SA's capital position given possible regulatory changes.
