Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
EUROPE'S SOVEREIGN-DEBT AND CURRENCY woes prompted fresh declines in European stocks last week, as the major markets fell 3.5% to 4%. The selloff left the Euro Stoxx 50 index of the biggest continental stocks with a year-to-date loss of 13%. That translates to a 24% hit for U.S. holders, given the decline in the euro.
European banks have been hit hard as investors worry about the institutions' exposure to the debt of Greece and other so-called PIIGS -- Portugal, Italy, Ireland and Spain -- as well as the impact of fiscal austerity on some relatively fragile economies.
Many major banks, including Barclays (ticker: BCS), Société Générale (SCGLY), Deutsche Bank (DB) and BNP Paribas (BNPQY), look cheap. They now trade near tangible book value, a conservative measure of shareholder equity that excludes goodwill and other intangible assets. The banks also trade for single-digit multiples of projected 2010 profits.
Some U.S. investors have been eyeing the European banks, given their low valuations and attractive franchises in countries whose banking markets are more consolidated than ours. European banks could benefit if tough U.S. financial-services legislation on derivatives prompts investors to deal more with overseas institutions. Société Générale and Barclays could be the best bets within the sector; both stocks trade below tangible book value.
There are plenty of risks, including a potential restructuring of Greek and other sovereign debt, as well as onerous new capital and regulatory rules. European financials, moreover, can't be examined in a vacuum because American financials also have been hammered lately, enhancing their appeal relative to their European counterparts.
Most major European banks get a sizable chunk of profits from investment banking and trading. Deutsche Bank, for instance, is akin to a German Goldman Sachs (GS), as more than half of profits -- and 90%-plus in the first quarter -- come from its investment bank.
German and French institutions hold substantial amounts of PIIGS debt, exceeding their total capital. French banks have $911 billion of such debt exposure, although a sizable amount stems from lending activities in those countries through local subsidiaries, and not holdings of debt issued by the governments. Still, the risk helps explain the willingness of the European Central Bank to craft a $1 trillion bailout package for shaky continental nations.
Many investors are trying to handicap the losses European banks could suffer. If the European banks get only 75 cents on the dollar for their PIIGS bonds and loans, an admittedly harsh scenario, French and German banks could lose more than 30% of their capital, a sizable hit that would probably force them to raise fresh capital.
FRENCH BANK STOCKS HAVE FALLEN sharply due to outsized exposure to the weaker European countries. Société Générale, with shares at 35 euros ($43.97), has tangible book of â?¬37; its U.S.-listed shares trade for about 9. Morgan Stanley analyst Maxence Le Gouvello du Timat recently reiterated an Overweight rating and an aggressive target of â?¬63 after the company's first-quarter profit release earlier this month. Du Timat says the bank's Greek exposure is "manageable," at â?¬3 billion of government debt and â?¬3.8 billion of loans via a majority-owned Greek bank. Rival BNP has about â?¬8 billion of Greek exposure.
Barclays gets more than half its profits from its investment bank, Barclays Capital, which bought a substantial portion of Lehman Brothers after its 2008 bankruptcy. Barclays trades around £3 ($4.33), about 10% below tangible book. The U.S.-listed shares are at 17. Deutsche Bank analyst Jason Napier has a Buy rating on the stock, with a price target of 415 pence based on a sum-of-the-parts analysis.
Steep losses on sovereign debt would impair Europe's biggest banks, but that is a worst-case scenario. Some analysts are bullish on the sector, as shares trade near tangible book value.
The two big Swiss banks, UBS (UBS) and Credit Suisse (CS), are trading at about two times tangible book. They look more expensive than peers, but the valuation ignores their valuable asset-management and private-banking operations. Deutsche Bank analyst Matt Spick values Credit Suisse at â?¬66, above its current price of â?¬45, with more than half its value in the private bank and the rest in the investment bank. Credit Suisse's U.S. shares trade at 40.
While there is plenty of risk in European banks, their depressed shares already reflect much of the danger.
E-mail comments to editors@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Janney Capital Markets cites Heinz, Kraft and Kellogg.
Wunderlich raised estimates and the target price on the industrial firm.
A recent surge in the tech giant's shares may have triggered selling. Video: CEOs Sell at Delta, Henry Schein
First-quarter margins disappointed, however fundamentals are improving and the stock looks outright cheap.
Sandler O'Neill says Long Island banks generally say the worst is behind.
FBR Capital upgraded the retailer to Outperform.
Dundee Capital is cautious on smaller producers in the near term.
Credit Suisse downgraded the drugstore chain to Neutral.
Growing demand for services that rein in medical costs makes this stock a good health-care pick. Video: Medco Health's Bright Prospects
Fund pro John Buckingham likes oil-services stocks. But he's also a fan of Disney and American Eagle Outfitters.
CA Technologies' outgoing chief operating officer executed the biggest insider sale at the company since August 2007.
Shares of the discount retailer, which Thursday announced a tepid forecast, are now on sale.
Caris & Co. upgraded the energy firm to Above Average.
Collins Stewart likes First Solar the most in the sector.
His vote allows the financial reform bill to move through Congress. (At SmartMoney.com.)
It may not have been another "flash crash." But Terrible Thursday proved no slouch at bettering the market. So where do we go from here?
AN INTERVIEW WITH ARTHUR MORETTI: This Neuberger Berman fund manager sees opportunity in the convergence between growth and value.
A revolutionary approach can ease family conflicts and make distributions more predictable.
Data-storage giant EMC is ready to cash in on the next digital explosion.
The popularity of DSL is keeping telecom giant CenturyLink relevant.
As cities and states struggle, investors must be nimble. What to look for in tax-exempt bonds. Our picks.
Europe's biggest banks have been punished more than they deserve.
As it heads toward $1 trillion under management, JPMorgan Private Bank is working to keep service levels high.
Alongside the nuclear controversy, an art scene flourishes. Collectors are taking notice: Prices of Iranian contemporary art have jumped -- and they're likely to keep going up for another five or 10 years. How Westerners are getting in on the action.
Read Full Article »