After two years of stellar gains for global investment banks, JPMorgan has announced its top picks for the sector in the coming year.
JPMorgan is overweight on European investment banks, indicating it has a "buy" rating on UBS, Deutsche Bank and Barclays. It sees 10 percent upside for European banks in 2014 and is seeking "heavy exposure" to investment bank-geared stocks.
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"We continue to see lot of regulatory headwinds for (investment banks) but this is more than discounted in valuations in our view," Kian Abouhossein, a London-based banking analyst for JPMorgan said in the note.
JPMorgan expects "traditional banking growth and improvement in asset quality" in the euro zone thanks to an increase in gross domestic product of 1 percent this year, compared to a contraction of 0.4 percent last year, and the likelihood that there will be no interest rate increases – especially in southern Europe.
UBS – the world's largest private bank by its assets under management, according to management consultant Scorpio Partnership – came in top of JPMorgan's European and global picks. The Swiss bank remains the best capitalized wholesale bank, according to JPMorgan, with a series of valuation metrics all pointing to a buy.
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"We believe the recent underperformance of UBS provides an attractive entry point to investors," Abouhossein said.
UBS reported its last quarterly profits back in October which came in slightly above expectations. Its third-quarter net profit of 577 million Swiss francs ($644.2 million) beat estimates of 537 million Swiss francs. UBS also said in its earnings report that it had been asked to hold 50 percent more capital by its Swiss banking regulator because of "known or unknown litigation, compliance and other operational risk matters". This caused it to push back its profitability target for shareholders of 15 percent by a year to 2016.