The euro crisis certainly has been generating a lot less headline activity lately than it was at its heights over the summer and at the end of last year.
Market volatility has been mostly crushed in Europe since Mario Draghi and the ECB introduced their OMT bond market intervention program in August, so it's been fairly quiet.
Meanwhile, U.S. markets continue to gyrate on every development related to the fiscal cliff.
BofA's European bank analysts offer a striking picture of how much the story has changed and the focus has shifted in their 2013 outlook.
Remember – European banks have long stood at the center of the euro crisis. The interbank lending market has been frozen by balance sheets plagued with devalued sovereign debt and toxic mortgage-backed securities in some areas like Spain. Although the ECB's recent actions have alleviated a lot of the pressure, the latest data on cross-border interbank lending from the BIS shows the market is far from thawed.
Nonetheless, the focus has now shifted so far from the euro crisis to fiscal cliff worries that BofA's Derek De Vries, a European bank analyst, cites the U.S. macro environment as the biggest risk to his bullish call on European banks in 2013.
If everything goes smoothly on the U.S. front, European banks could be up 20 percent in 2013, according to De Vries.
Here is what De Vries wrote in his outlook for clients:
US macro is biggest risk to bullish view on European banks
While the economic situation in Europe is poor, we think it is well understood by market participants and therefore priced into European bank shares. Therefore, in our view, the biggest risk to our positive stance on European banks is the US macro outlook. Our US economists highlight that the situation in the 50 US states is fine, but it is Washington DC that poses a problem. Our economists expect fiscal uncertainties to negatively impact confidence levels in the coming weeks and months...
We believe European banks can continue to re-rate if the US economy slows, as our economists predict. However, if, as a result of the fiscal cliff, the US is pushed into a recession, we think there will be a global risk-off trade and European banks could fall back to 0.7x tangible book value (~25% downside).
On the other hand, De Vries doesn't expect European bank shares to be driven by the shifting regulatory environment, returning liquidity concerns, or massive bank deleveraging, which makes his call a bit controversial, as he concedes.
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