Would you buy Eurozone Banks right now?
Hey everyone out there, I wanted to start posting and discussing market views in this forum because some of the best insight I have ever read has come from this forum and I want to begin giving back. The first view I have is that Eurozone banks are a great buy right now. Their shiller P/E's are historically low and I believe that their share prices are beginning to bottom out. I don't see much downside risk as the ECB has stated several times that they will prop up banks to avoid crisis, and profitability cannot get much worse in this low interest rate environment. I think it can only go up from here, but the only question I have in my mind is how long will it take? Profits will not improve until the interest rates begin to rise again which is proving to take much longer than what I thought a few years ago. Would love to hear what you guys think.
Short answer: I would avoid the whole sector. Most of the European banks are a total mess.
Their returns are also at multidecade lows and leverage is still very high. P/E is a really simplistic way to think about bank valuation.
Propping up banks doesn't necessarily mean they'll prop up the share price. You can save a bank and still destroy the equity value to shareholders. See: RBS, Citi, and current hot topic BMPS.
Profitability can ALWAYS get worse. Look at the Japanese banks. That's the future of the European banking industry IMO.
100% Agree. The Eurozone does not look very healthy at the moment and I don't see a recovery for a substantial period of time. Things are changing like never before and the current macro environment in Europe does not look particularly stable.
The first comment summarizes situation well. Plus, there are good reasons behind the low P/E, so it is far from being a good indication IMO.
Just a point of clarification, the ECB's level of support is limited. There are numerous rules within the EU around support for banks. The ECB can support banks to the extent they have eligible repo collateral. Governments are unable to support banks without wiping out shareholders and bailing in a certain number of unsecured creditors. Investing in European banks is not for the faint of heart. You need to have a STRONG handle on the credit situation of what you're getting into.
Exactly. Without getting into specifics I have spent my summer working on a project that directly involves the issues being discussed here.
The most I can say publicly is that I wouldn't touch these banks with a ten foot pole from an investor's standpoint and that it has to do with what I have seen of their cultures. Saying that they are less functional than IniTech doesn't even begin to describe it.
Could you elaborate a little more on this?
+1 for Initech reference
Adding nuance to the first comment above from models_and_bottles, there are European banks that have performed well post crisis (both US housing and EU debt crisis), but these banks have largely been those boring 'utility-model' banks. For example, KBC, NATIXIS, BGEO, most of the Nordics, etc. have done surprisingly well. The common factor across all these banks has been an emphasis on capital light businesses (i.e. focused on generating high returns on RWAs) as opposed to risky capital markets businesses (i.e. FICC). If you want to see how that's working out, check out Credit Suisse and Deutsche Bank. Obviously, the EU has a ton of problems facing it both from a monetary/fiscal perspective and real world problems (e.g. immigration, terrorism, political instability) and this may change the story going forward. On the whole, the 'story' for the sector going forward will likely revolve around finding a bank that is less likely to go bankrupt whenever the next proverbial camel back breaking straw hits.
Bottom line, probably avoid the whole sector, but if you're running a market neutral L/S strategy, there's still money to be made - just extremely risky given the entire EU situation is a royal shit show right now.
Good point on Nordic banks. Probably the safest place to hold your deposits in Europe.
So if the general consensus is not buy, then it's definitely a buy. Gonna load up on those DB calls like a pro.
1) using the p/e metric for a bank is useless because banks are a leverage institution, where debt is an asset to them. You should look at p/a if you want to look at it from a valuation standpoint 2) I would never touch a European bank - the bad loans build is is beyond ridiculous 3) Deutsche Bank is trading a pre-2008 lows and is on track to go bankrupt. It's notional derivatives exposure is absolutely huge 4) he European economy is stuffed due to rising taxes, smoothing real incomes and business growth, and negative interest rates is killing Europe - killing retirement savings.
If you want to go broke, buy a European bank
I'd say the equity here is untouchable for the above mentioned issues but if you go higher up the capital structure there is almost no risk of not being paid because of the worlds attitudes of too big to fail. I'm long RBS and lloyds high yield notes for days. The bonds will tighten eventually. Gonna keep buying all the stuff I can at 7 even 8 handles. Bonds in the 70s 80s are probly gonna have a tough time but eventually your gonna get paid.
For everyone who says that European Banks are bad. Would you short the banks?
No. European banks are a sector to avoid altogether for any sort of mid-long term view. No matter what you take there is strong possibility that you'll experience large adverse swings.
Only viable thing at the moment is wait for some shitty headline about Deutsche Bank/Montepaschi failing a random stress test and buy the dip hoping to catch the dead cat bounce on SX7E when draghi/some minister pledges another package/whatever it takes.
Not saying DB is anywhere near in good shape, but it's funny how you are discussing DB and an Italian bank that is failing coloassaly in the same context. Even in the recently announced stress test, this Italian bank sees its capital getting wiped out completely under a certain stress scenario while DB still remains in positive territory.
It's like watching the pre show of 2008 all over again, except this times its in Europe and more leveraged than ever before. So, yes, I would short he European banks. And I certainly wouldn't try and work for one - zero job security going forward.
Pretty impressive that no one mentioned the Italian referendum on a discussion about the EU banking system - in other words all the advice in this thread are garbage.
Lol. Champ you go long and I'll go short, we will see who's laughing at the end of the day.
The referendum is a joke. Renzi wants to cut down the size of government so he can govern and do what he wants. At the moment, he can't govern due to so many parties in parliament. He wants a cleaner system so he can becomes the next Benito Amilcare Andrea Mussolini and run the joint.
Renzi already tried to save Monti pashi in July, and it failed. They need to find a buyer for bad loans which hasn't happened yet.
The Italian banking sector has 360 billion in bad loans, which is signicantly more than 2008 financial crisis.
Good luck going long champ. You will need it.
I am neither long nor short; you should start reading what others say before jumping to silly ass conclusions - the referendum has everything to do with the future path of Italian governance and the power Ranzi will get. The Italian banking system is fucked and they have no serious ways of cleaning up their NPLs off the balance sheet - the referendum would be a right way in that direction. Keep your Mussolini bull shit to yourself, I am not arguing about whether anything is good or bad I am talking about the path that are being considered in the Italian banking system.
The upcoming referendum in Italy is about constitutional reform, not about the banking system. I am not sure that it's a good idea to accuse others of talking garbage while demonstrating such ignorance.
Of course - because NPL resolutions are being passed through and all is fine. The current patch work of shitty legislations that are being passed through are working? The constitutional reform would allow for future regulations and legislations for speedy NPL resolutions which is key to unblocking the Italian banking system. Whether that works post referendum or not is yet to be seen, but would certainly be a good sign for the market. God I wish I had you as a client when I used to work on the buy side, with that type of first degree reasoning you must be a nice client to have when trying to unload some toxic assets.
I've done a lot of work on the Italian banking sector and have initiated positions in both Intesa and UniCredit, both of which offer exceptional value in my opinion and different ways to play the Italian situation. Many people I speak to want to stay as far away from the sector as possible without having done much work to justify their view. I believe there is a price for every asset and the question is not "how bad are EU banks doing" but rathar what expectations is the market pricing in and are those expectations too negative? I will add that I am a long term investor who doesn't have to worry about monthly redemptions.
Would you have seen value in Lehmans before it went under in 08? While the other bankers were out to get Lehmans, after it didn't back them during the LTCM crisis in 98', this is the exact same crisis. The bad debts won't sort themselves out. No matter how you look at it, the story had gone from bad to worse...and now its going to shit. Long term investors will get cleaned up.
Italy is probably going to face a revolution in the years ahead, when the banking sector goes under. The majority f households own bonds and banking shares. it won't be pretty.
There are close to EUR 360 bn of NPL's in the Italian banking system which seems like a massive number until you realize that it equates to c1.5% of outstanding sovereign (Italian) debt. Basically, this mess could be cleaned up quite easily at the state level without having much of an impact on Italian Debt/GDP ratios. Now, before you start talking about BRRD and EU state aid rules, I understand that any such state-backed solution is illegal under the current rules. However, Italy is TBTF and if Italy falls the entire European "project" falls with it. My view is that the powers that be (Merkel and co.) would rather bend the rules, which they have done so many times before, and save Italy and the European project than dogmatically stick to some state aid rules and watch Italy fall into disarray.
Now, on to my thesis. If you increase NPE (I'm talking full bad loan exposures here, not just NPLs) coverage ratios to match bid levels for those loans you get a much clearer picture of how much capital the banks need to clean up their balance sheets. So, most bids for NPL's are in the 20% range which means that banks need to increase provision levels to 80% of notional on these loans. If you do that, and run those tax-adjusted losses through your P&L, you arrive at a massive capital hit for each bank. Under my numbers Intesa Sanpaolo is the only bank that can do this without needed any fresh capital as it already has one of the strongest capital positions in Europe, hence the bank trades at 0.7x TBV with the rest of the Italian sector trading at 0.4-0.5x (ex. Monte). My view on UniCredit is that, while the bank will need fresh capital (EUR 10 bn under my numbers), of the Italian banks out there, it is the one most likely to be able to raise capital privately without needing to bail in debt under the BRRD.
Never buy cheap banks. What are they going to do to drive EPS? Below book value sounds good but is a dangerous place to be.
Anything they are going to do to improve their balance sheet will hurt shareholders
i hear DB has an awfully low shiller PE with a strong moat, and the ECB+Bundesbank has ur back... good luck, macro tourists...
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