Banking stocks part 2 – Handelsbanken, Lloyds, Van Lanschot, Pfandbriefbank, Citizen (and yes Deutsche again)
This is the follow-up post to the one from last week about banking stocks in general and Deutsche Bank in particular.
Damodaran on Deutsche Bank
Before moving on to my own stocks, again Deutsche Bank. Prof. Damodaran did value Deutsche Bank last week and came to the following conclusion:
At the current stock price of $13.33 (at close of trading on October 4), the stock looks undervalued by about 36%, given my estimated value, and I did buy the stock at the start of trading yesterday.
What he basically does is that he assumes an ROE of around 9,44% after ten years and capital costs around the same number,wich at the end of the day is assuming some kind of mean reversion and a Price to book value of ~1 in year 10.
What I do like about Damodaran that he always makes his assumptions very transparent. So it is quite easy to disagree with him on certain assumptions which I do not want to do here. I want to make another, more general point:
Assuming “average ROEs” in 10 years and a cost of equity at around 10% will turn almost any European banking stock into a great investment at current valuations which are a fraction of book value in general.
However in my opinion the biggest issue with Deutsche bank is the following: The management and the Chairman of the Board at the end of the day do not care about shareholders. They will do everything to protect the bank in its current form. Instead of selectively selling business to increase capital, they will happily sacrifice the shareholder and issue a lot of new dilutive stock if they have to. I think the probability of a dilutive capital raising is quite high.
Back to my own banking stocks – what to do now ?
My readers know that I do have quite some Banking exposure. Within my special situation bucket , I own Lloyds, Pfandbriefbank, and Citizen Financial, on top of that I own Van Lanschot as a “boring” value stock and Handelsbanken as a core holding.
Together, that is almost 15% of my portfolio. In general, all banks are impacted by the flattening of the yield curve and the spread compression and my timing and the fact that I kind of overweight banking stocks was clearly not optimal.
However I would compare banks in the current situation a little bit like Oil companies: For those who produce at a really low cost, you can still make money and over time, competition might go away to a certain extent, especially if you make your money in retail.
So for Handelsbanken, I am still quite optimistic as I consider them “best in class”. They do have a cost advantage and are well run despite a recent CEO change. Of course, we will mabye not see the growth I assumed in the initial case, but the downside risk should be limited as well. Looking at the stock price we can easily see that Handlesbanken has done much better than the European banking index and also slightly better than local peer SEB.
With Lloyds, I clearly didn’t take into account the Brexit with its drastic impact on UK interest rates. I still belive that they are the best “big” UK bank, but it is hard to justify an overweight. That is the reason why I cut down my overweight compared to the other banking stocks to fund the (undisclosed) UK Small cap.
At least my assumption that Lloyds is the best of the big 3 UK banks is somehow validated by the stock price, as Barclays did slightly worse and RBS much worse:
I am not sure to be honest what to do with the stock. If UK interest rates stay where they are, this is clearly a game changer for all UK banks. Also I find it difficult to turn a special situation (gone wrong) into a long term investment. I do think there might be better UK opportunities out there.
For Van Lanschott, the current EU environment means that the turn around will be much slower than I anticipated. I will need to check how they progress in their private banking business which in my opinion gives them a better chance to increase profits. But it needs to be seen if they can really grow that part.
The chart shows that interestingly Van Lanschot trades pretty much in line with ING but significantly better than the banking index:
Citizen’s in the US is less effected from the ECB’s aggressive move into Corporate bonds, but Janet Yellen already indicated 2 days ago that she might be willing to follow the same road if things are gettng tough in the US once again. So no reason for complacency.
Citizen’s stock has done comparably OK if we compare against JPM, Wells Fargo or US Bancorp:
I still think it could be an acquisition target, on the other hand it was a special situation (RBS forced sale) and I am not really convinced for the long term.
Pfandbriefbank finally is the most interesting case. As a pure mortgage lender with the Pfandbrief as financing instrument, they are to some extent less negatively effected. However, especially in the mortgage market the non-traditional lenders are moving in aggresively. This already led Pfandbriefbank to drastically cut their growth targets and target an entry into the US market.
Personally, I don’t think that this is a good idea. No one is waiting for Pfandbriefbank in the US and USD funding for European banks is not cheap. I still think it would make a lot of sense to combine Aareal and Pfandbriefbank in order to cut costs.
However we can clearly see that Aareal bank has done better over the last year, but clealry Deutsche Bank and Commerzbank are much worse.
Pfandbriefbank sits on a lot of Excess capital, especially now that the Heta case seems to be resolved in their favour. I am a little bit irritated that managment is always talking of potential significant higher capital requirements (Basel IV) without giving specific details.
For the time being I will keep the shares but I am not 100% happy with managment.
Overall I think within a bad secor, my stock picks did relatively well.
I do think within my own banking “portfolio”, the “special situation” Citizens and Lloyds are the first stocks to go if I have better ideas. Van Lanschot and Handelsbanken are more longer term cases which look more difficult right now then when I bought them but are still intact. Pfandbriefbank still has the best prospects among the special situations and will stay for the time being as well, but one has to watch management closely.