Shares in Deutsche Bank, one of the eurozone's most maligned and underperforming banks plunged 7.5 per cent overnight to a fresh record low, after it reiterated it would not be conducting capital raising and denying it had approached Berlin for help in paying $US14 billion ($18.3 billion) in penalties to the US Justice Department.

The swift sell-off, which spilled to fellow bank shares, reflects the negative sentiment in the overall sector and in particular banks who derive a high level of earnings from investment banking arms.

But Citi equity strategists say that the sector, which is the worst performing of the 285 it tracks over the past 10 years, is the "world's biggest contrarian trade".

"Recently, fortunes for global banks have improved," Citi equity strategist Jonathan Stubbs said.

While the improvement was not in the sector's share price performance or in positive share price returns year to date, it could be seen in a mixed performance, which is better than the across-the-board misery in the share prices of banks across the globe.

"That is the improvement," he said.

Japanese and European banks have been the chief underperformers, but emerging market banks are performing well due to the declining risks from current account debt, a stronger US dollar and commodity price woes. 

Europe to improve in 2017

Specifically for Europe, conditions are set to improve in 2017. Nominal GDP growth is expected to hit between 2.5 and 3 per cent, according to Citi estimates, which should underpin credit conditions.

The view is shared by AMP Capital head of dynamic asset allocation Nader Naeimi. Describing global banks as "the only place to hide" amid the recent volatility, Mr Naeimi said the European Central Bank was cognisant of the margin pressures negative interest rates had put on the banks, and they could switch up their monetary policy to support the banks.

"Buying fewer long-dated bonds and more short-dated bonds, would result in a steeper yield curve and be helpful for the banks," he said.

European banks are also offering up value, Mr Stubbs said.

"They are cheap on a price-to-book basis in absolute terms and also relative to the market. On both measures, the sector is trading at or close to both recent GFC and sovereign debt crisis lows," he said.

This discount to premium segments of the market would bode well for bank stocks into next year as investors shift out of defensives. Higher interest rates in the US, higher bond yields, fiscal easing and smoother global growth should all attract shareholders to cyclical sectors of the market, including banks. 

Focus on sustainability

Euro area banks are also offering an attractive yield, a theme which has dominated global investing. While global banks offer a collective yield of 4 per cent, European banks offer a 5 per cent yield. However, Mr Stubbs said investors needed to discern which among the bank yields were sustainable.

While Citi is advising investors to avoid being underweight the banks, they recommend investment high quality banks that may be more expensive than the sector itself for security, such as Dankse Bank, banks with exposure to emerging markets, including Standard Chartered and BBVA, and a barbell strategy, where core investment in quality banks is added to by smaller investments in higher risk banks, including Italian banks Unicredit and Banca Intesa.

Its least preferred banks include HSBC and Deutsche Bank.

"Deutsche Bank has a market-leading position in several investment bank products. However, the profitability and returns of this business have come under increasing pressure and other businesses, such as German retail banking, have also struggled to generate respectable profitability," Citi said.

Too many risks remain with Deutsche Bank with respect to generating revenue, litigation and its capital position, Citi said.