Negative rates will likely erode bank profits by 5-10 percent according to Head of European Banking Research at Morgan Stanley, Huw Van Steenis, who said that a deposit rate cut beyond 10-20 basis points, could have an "exponential" impact on earnings.
"With rates set to remain lower for longer, margin pressure is set to be one of the biggest concerns for European banks also in 2016. We are concerned another bout of ECB QE (quantitative easing) will be negative, not positive for the banks. Moreover negative rates really concern us," he said.
Morgan Stanley believe banks with a stronger asset and wealth management bias look set to benefit from ECB policy, such as UBS and Credit Suisse.
JP Morgan's pick of the sector also included Danske Banke, along with Lloyds, which was bailed out by U.K. taxpayers in 2008 and Austrian bank Erste Bank.
"We want to own dividend-paying, high cashflow-generating banks which can sustain shocks … these banks are not the highest dividend yield payers but we have high conviction on dividend per share (DPS) to be delivered," Abouhossein said.