3 Goldman Euro Bank Upgrades

NEW YORK ( TheStreet) -- Goldman Sachs' European equities research team recently added three banks as recommendations to a sector list the strategists argue will benefit from improving creditworthiness in the "peripheral Eurozone," a term used to refer to Portugal, Ireland, Italy, Greece and Spain.

Goldman's strategists further argue banks are "one of the least expensive sectors in the market and the trade-off between their growth prospects and earnings in the next few years looks especially attractive," according to a Feb. 3 report.

Goldman already had a positive view on global European banks, but was more bearish on domestic retail banks, especially in the periphery.

"We believed that the global banks (large by market cap) were better positioned in terms of balance sheetstrength and also had diversified revenue streams that enhanced the prospects for loan growth. In general, domestic retail banks, meanwhile, have weaker balance sheets and faced mature end markets that were de-leveraging," the report states.

In the U.S., Goldman's bank analysts recommend Citigroup ( C) and JPMorgan Chase ( JPM) among large-cap bank names and Huntington Bancshares ( HBAN), Banco Popular ( BPOP) and East West Bancorp ( EWBC) when it comes to regional bank stocks.

As for Goldman's European analysts, they already had buy ratings on several stocks, including Swiss bank Jules Baer, Sweden's SHB, Spain's BBVA , France's Societe Generale, and Belgian-based lender Dexia. They also had conviction buys on Erste Bank in Austria, France's BNP Paribas, and U.K.-based HSBC ( HBC) and Lloyds Banking Group ( LYG).

However, they suspended ratings and price targets on Allied Irish Banks ( AIB) and the Bank of Ireland ( IRE) citing "limited visibility over the banks' fundamentals, pending reforms of the financial sector and macro recovery outlook."

Goldman's European bank analysts also got more bullish on three stocks in a sector outlook published at the start of the month. Here are those stocks.

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3. Danske Bank ( DANSKE.CO)

Goldman's analysts upgraded Denmark's Danske Bank to "buy" from neutral, setting a 12 month price target of 193 Danish kroner ($35.25). They expect Danske Bank to grow earnings fastest of the six Nordic banks they cover, a group that includes, DnB NOR, Swedbank, Nordea, SEB and SHB.

They also are looking for nonperforming loans to stabilize in the bank's Danish operations. They believe the bank has traded at a discount of up to 28% versus its peers over the last six months because it carries a thinner capital cushion. Also, Denmark's central bank has not raised interest rates as Sweden and Norway have done, meaning Danske Bank has not benefitted from the resulting deposit margin expansion. However, Goldman's analysts believe Danske Bank's capital cushion is sufficient and regard the bank as "well-capitalized," while projecting a 10.9% core tier I ratio by the end of the year.

"As Danske reports cleaner earnings, we expect investors to reward it for its strong capital position, limited sovereign exposure and defensive earnings mix," the report states.

2. Unicredit ( CRDI.MI)

Goldman's analysts added Unicredit to their conviction buy list Feb. 1. The Italian bank "is one of the few large European banks that still trades at a discount to tangible book value," They argue the discount indicates concerns about weak profits and a murky picture regarding governance and management strategy. Also hurting the stock's valuation are concerns about further weakness in funding costs for Italian government debt, according to the report.

"While sovereign and funding remain potential areas of uncertainty, we expect visibility on management strategy and group profitability to improve in the coming quarters," the report states.

Among the risks the analysts highlight are either a sudden worsening of the macroeconomic picture or in European sovereign credit costs. They also have concerns about management's ability to execute on its plans to manage costs, as well as potential exposure to the Madoff fraud. As JPMorgan Chase proved last week , such exposures cannot be overlooked.

Among several positive signs Goldman's analysts expect from Unicredit in 2011, the expect "a gradual improvement and recovery in the group's depressed bottom line over the coming quarters primarily thanks to a moderate expansion in pre provision profit (+6% in 2011) and lower loan losses (-22% yoy in 2011) as the bank benefits from positive trends in Germany and core CEE countries and a stabilizing asset quality trend in Italy," the report states.

1. Sarasin & Co. ( BSAN.S)

Goldman's analysts added the Swiss bank to their conviction buy list Feb. 1, raising their target price on Sarasin by 20%, while lifting earnings expectations for 2010, 2011, and 2012 by 15% 11% and 14% respectively. The main driver of the estimate change is a view that Sarasin did a better job than peers at both gathering assets and earning returns for clients. Sarasin is set to report second half results for 2010 on Feb. 24.

They call Sarasin a "pure-play private banking story, with strong volume growth thanks to inflows from emerging markets," noting it has limited 'exposure "old money" from European offshore banking.' They argue Sarasin is "one of the five banks offering the highest volume growth in our European coverage."

Goldman also believes Sarasin's profit margins should hold up well and possibly improve. "Sarasin's pretax profit margin has been resilient thanks to growing volumes, allowing the bank to contain the effect of falling top-line margins. As a result, continued volume expansion should result in strong profit growth. Net interest margins, as well as normalization of noninterest income (putting more of the recent net new money to work) should lend support to top-line margins," the report states.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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