Financial metrics exposé of European banks

Equities 7 minutes to read

Peter Garnry

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).

NameMarket capPTBVTier 1 ratioEfficiency ratioNIMFwd ROE
DNB ASA18,1840.9220.842.51.739.13
ING Groep NV23,4000.4416.756.71.716.56
KBC Group NV17,6631.0418.756.41.798.85
Banco Bilbao Vizcaya Argentaria SA15,6830.3513.650.92.656.19
Banco Santander SA26,3800.4013.156.62.755.80
Svenska Handelsbanken AB14,1240.9820.748.81.319.41
Skandinaviska Enskilda Banken AB16,4771.1320.845.90.9310.99
Swedbank AB15,0871.2519.444.51.2011.59
Raiffeisen Bank International AG4,3030.3915.558.32.916.66
Lloyds Banking Group PLC20,3090.5116.769.01.467.25
Barclays PLC18,4400.3417.771.41.455.70
Natwest Group PLC14,0580.4018.566.01.795.21
HSBC Holdings PLC67,2030.5417.675.51.586.17
Nordea Bank Abp25,9990.9518.369.70.968.49
Danske Bank A/S9,7590.4920.466.91.026.76
Banca Mediolanum SpA4,5592.3319.544.00.6418.77
Credit Suisse Group AG20,6570.5417.177.11.317.57
Erste Group Bank AG7,6930.5615.066.92.187.06
BNP Paribas SA38,6000.4313.570.31.386.07
Intesa Sanpaolo SpA31,1160.6315.358.70.956.38
UBS Group AG36,3690.7820.080.60.588.19
UniCredit SpA15,7190.3114.968.21.394.78
Standard Chartered PLC12,1830.3616.570.91.554.75
Bankia SA3,7890.3015.957.51.122.60
Credit Agricole SA21,3470.5313.763.30.895.46
Deutsche Bank AG14,6450.3115.6108.81.452.75
CaixaBank SA10,8440.5313.572.61.895.66
Bankinter SA3,2960.7412.260.31.666.91
Societe Generale SA9,5010.1715.171.91.063.81
Commerzbank AG5,2090.2014.379.91.441.82
Unione di Banche Italiane SpA3,9150.3612.372.21.533.92
Natixis SA5,9380.4613.172.20.234.94

Source: Bloomberg and Saxo Group

We ranked each financial institution each of these financial metrics including its market cap in EUR and the price-to-tangible-book. Please refer to the ranking methodology in the bottom. The list above is an objective ranking on a selection of financial metrics relevant for financial institutions and should not be viewed as our recommendation 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.

Ranking methodology is as follow: 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)

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.