Financial metrics exposé of European banks
Head of Equity Strategy
Summary: Yesterday, we made a positive case for European banks and said that they should be able to get back to early 2019 profitability which was quite good given the low growth and low interest rate environment. The Covid-19 pandemic has caused a lot of pain for banks through lower net revenue but also rising loan provisions due to lower economic activity across many different sectors. Investors have run away from banking stocks making them historically cheap but often assets are cheap for a reason. In this analysis we take a look at 32 banks in Europe and how they stake up across several financial and operating metrics.
Yesterday we wrote a research note on European banks following the volatility in HSBC shares and the dramatic performance this year for the industry. The main question is whether the industry can get back to the early 2019 profitability level which was around 7.5% return on equity which is quite acceptable given the low growth and low interest rate environment in Europe. While the industry looks interesting from a risk-reward ratio, although the bet could take years to play out in full, there is also interesting divergences among the individual banks in Europe. In this research note, we will look at 32 banks and financial services companies in the Bloomberg Europe 500 Banks & Financial Services Index.
Banks are often valued on price-to-tangible-book or price-to-earnings. We prefer the former ratio but differences in this ratio reflects many different parameters of a financial institution. The most important financial metrics are the Tier 1 Capital ratio which reflects the leverage of the balance sheet and how much capital the bank has available to withstand losses. The efficiency ratio is the operating costs to income ratio where the lower the better. The net interest margin (NIM) reflects both the competitive landscape but also the profitability for banks on its earnings assets against its borrowing costs. Forward return on equity expresses analyst expectations for return on equity in the future and is thus forward-looking (in this analysis we used the 2-year blended forward estimate).
|Name||Market cap||PTBV||Tier 1 ratio||Efficiency ratio||NIM||Fwd ROE|
|HSBC Holdings PLC||67,203||0.54||17.6||75.5||1.58||6.17|
|BNP Paribas SA||38,600||0.43||13.5||70.3||1.38||6.07|
|UBS Group AG||36,369||0.78||20.0||80.6||0.58||8.19|
|Intesa Sanpaolo SpA||31,116||0.63||15.3||58.7||0.95||6.38|
|Banco Santander SA||26,380||0.40||13.1||56.6||2.75||5.80|
|Nordea Bank Abp||25,999||0.95||18.3||69.7||0.96||8.49|
|ING Groep NV||23,400||0.44||16.7||56.7||1.71||6.56|
|Credit Agricole SA||21,347||0.53||13.7||63.3||0.89||5.46|
|Credit Suisse Group AG||20,657||0.54||17.1||77.1||1.31||7.57|
|Lloyds Banking Group PLC||20,309||0.51||16.7||69.0||1.46||7.25|
|KBC Group NV||17,663||1.04||18.7||56.4||1.79||8.85|
|Skandinaviska Enskilda Banken AB||16,477||1.13||20.8||45.9||0.93||10.99|
|Banco Bilbao Vizcaya Argentaria SA||15,683||0.35||13.6||50.9||2.65||6.19|
|Deutsche Bank AG||14,645||0.31||15.6||108.8||1.45||2.75|
|Svenska Handelsbanken AB||14,124||0.98||20.7||48.8||1.31||9.41|
|Natwest Group PLC||14,058||0.40||18.5||66.0||1.79||5.21|
|Standard Chartered PLC||12,183||0.36||16.5||70.9||1.55||4.75|
|Danske Bank A/S||9,759||0.49||20.4||66.9||1.02||6.76|
|Societe Generale SA||9,501||0.17||15.1||71.9||1.06||3.81|
|Erste Group Bank AG||7,693||0.56||15.0||66.9||2.18||7.06|
|Banca Mediolanum SpA||4,559||2.33||19.5||44.0||0.64||18.77|
|Raiffeisen Bank International AG||4,303||0.39||15.5||58.3||2.91||6.66|
|Unione di Banche Italiane SpA||3,915||0.36||12.3||72.2||1.53||3.92|
Source: Bloomberg and Saxo Group
The list above is an objective ranking on the market capitalisation. The list list makes it possible to see how European banks compare on the key financial metrics, but should not be viewed as our recommendations but as an inspirational list to see how valuation divergences between the different banks relative to key operating metrics.
The opposite story of Spanish and French banks
What immediately stands out are the two Spanish banks BBVA and Banco Santander which have been hit hard on valuation due to the severe negative impact from Covid-19 due to lockdowns and travel restrictions depriving the country much needed tourism income. However, the ranking suggests a very low valuation given their operating metrics. The best overall bank on these operating metrics relative to valuation and the market capitalization is DNB which is the biggest bank in Norway. The key risk for DNB is obviously its exposure to the Norwegian economy which is dependent on strong energy markets which are currently suffering from low oil prices. Another interesting observation is Societe Generale that has been hit by a slump in profits from its equity business driven by blowups in its structured product division. Societe Generale has seen its market capitalization dip below €10bn and currently has the lowest price-to-tangible-book ratio in Europe. On valuation it is the cheapest bank in Europe and thus could attract a lot interest from bargain hunters but it comes with big risks and analysts remain very skeptical of future return on equity.
The financial metrics should be interpreted as follows: Market cap (higher is better), PTBV (lower is better), Tier 1 ratio (higher is better), Efficiency ratio (lower is better), NIM (higher is better) and Fwd ROE (higher is better)