Due to Deutsche Bank AG (DB.US) and Commerzbank's stock price performance outpacing the broader market since the beginning of the year, Goldman Sachs has downgraded Deutsche Bank from "Buy" to "Neutral" while also cutting Commerzbank's rating from "Neutral" to "Sell."
Goldman Sachs analyst Chris Hallam wrote in a report to clients: "A combination of favorable growth momentum, more stable and steeper interest rate trends, along with continued earnings growth and rating upgrades have collectively driven European banking stocks up nearly 50% year-to-date, significantly outperforming the broader European equity market."
Overall, the analyst remains optimistic about the outlook for European banks, noting that Goldman's updated 12-month price targets suggest an average potential upside of approximately 10%, while some stocks rated "Buy" could see gains of around 20%.
Hallam assigns "Buy" ratings to UBS Group (UBS.US), ING Group (ING.US), Lloyds Banking Group (LYG.US), BNP Paribas, NatWest Group (NWG.US), Banco Santander (SAN.US), and HSBC Holdings (HSBC.US).
Hallam noted that the interest rate curve has steepened so far this year, while expectations for terminal rates have tended toward range-bound trading, giving investors greater confidence in the outlook for net interest income over the medium term.
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