UBS is betting on European banks over automakers right now. Here's why

Published Sun, May 14 20239:13 PM EDT

European banking stocks are poised to outperform automakers in the foreseeable future, according to UBS. The investment bank highlighted three structural changes that could drive significant gains for banking stocks over their automotive counterparts, despite similarities in their economic cycles. Historically, shares of banks and automakers tend to fall in tandem ahead of a recession. The Stoxx Europe 600 Banks index has lost 8% from its March peak, but according to UBS, bank stocks could be a bargain at 6.3 times forward earnings and 0.64 times price to book. Rising interest rates The European Central Bank's ongoing rate-hiking trajectory is one reason behind UBS' bullish stance on banks. The market's expected peak rate of 3.75% in July would further bolster banks' profitability from current levels. The trend is evident at one of Europe's largest and previously ailing lenders, Deutsche Bank . Thanks to the higher interest rate environment, it reported 1.2 billion euros ($1.31 billion) net profit for the first quarter late last month. Europe's largest bank HSBC also tripled its quarterly profit to $13 billion. Banks: No competition Banks' stellar returns are due to their expanding net interest margins. The measure is the difference between what a lender charges customers for loans and the interest it pays for savings deposited by customers. UBS strategists are bullish on the latter because, with far fewer banks in Europe than in the United States, competition for deposits is significantly lower, allowing deposit rates to remain at near zero. "Deposit competition and money market fund competition are substantially lower than in the US and so we don't expect a significant shift in deposit betas for European banks," said UBS strategists Gerry Fowler in a note to clients on May 11. Autos: Too much competition Meanwhile, the future looks less bright for the European auto sector. According to UBS, automakers face headwinds despite being cheap at 5.6 times earnings and 0.78 times price to book. The investment bank said European automakers face structural challenges while competing against Tesla and Chinese rivals. In the luxury market, the American automaker has already raced past European peers to become the continent's best-selling EV brand. "More premium brands in Europe may provide some safety but are unlikely to be able to expand margins," added Fowler. On the lower end, Chinese electric-car maker BYD is set to launch the Seagull priced at about $11,000 with a 250-mile driving range. According to the bank's strategists, European car manufacturers also have less ownership of their supply chain, particularly in battery technology and software, which poses a risk to their profit margins.