EUFN

Unicredit Struggles to Demonstrate Earnings Power

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When one looks at individual bank interests and also the national champion nature of many banks that are closely tied to their home countries, it becomes difficult to picture how the overtraded European banking landscape will resolve itself. One scenario is perhaps by smaller banks coming together, though that might not really move the needle that much. We generally dislike the banking industry due to the arbitrary nature of its cash flows, weak economic returns, and highly-regulated nature, and we think Unicredit may be one to avoid, in particular. By Matthew Warren Unicredit (UNCRY) put up another measly quarter, results released August 6, this time with small positive underlying net profits of EUR 0.5 billion. Revenues were down 7.7% compared … Read more

BNP Paribas is One of the Stronger Banks in an Overtraded European Landscape

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While some of the stronger global banks like BNP Paribas are showing that they can take the economic fallout from COVID-19 on the chin while maintaining some degree of earnings power and protecting strong capital levels, other banks with lesser earnings power and balance sheets are falling prey to this cycle with losses and lower capital levels. From our perspective, it is simply easier to find non-bank operating companies with strong moats, sound balance sheets, and visible free cash flow growth into the future. Be careful investing in banks! By Matthew Warren On July 31, BNP Paribas (BNPQF) put up a reasonable set of results in the second quarter, considering the global pandemic’s substantial impact on the economy. As you … Read more

Santander Working Its Way Through the Pandemic

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The underlying first-half results from Banco Santander are quite reasonable. We are impressed by how well the South American, Corporate & Investment Banking, and Wealth Management & Insurance segments are holding up in such a tough environment. In its large European operations, pressures that come from the whole continent being overbanked were evident, however. By Matthew Warren On July 29, Banco Santander (SAN) reported first-half 2020 results. The bank is working its way through the pandemic, with total income down 8% in the first half and underlying attributable profit down 53%. While it took massive goodwill write downs in the quarter, these do not affect its capital levels, which are healthy and growing since last quarter end. As one can … Read more

Deutsche Bank is Muddling Along, Aiming for Self Help

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Image Shown: Deutsche Posted Meager Second Quarter Results. Image Source: Deutsche Bank 2Q2020 Earnings Presentation While Deutsche Bank is working on a five pillar self-help plan with the goal of an 8% return on tangible equity by 2022, and seems to be making some progress on these fronts, the fact that the end goal is so timid shows just how overbanked the German and greater European markets are. The CEO is calling for consolidation in the medium term, but it cannot come fast enough, especially for those banks with very little in the way of earnings power, which must deal with a pandemic and the broad effect on the economy and the client base in the meantime. By Matthew Warren … Read more

BNP Paribas’ Shares Could Have Upside Potential

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BNP Paribas’ shares are trading at a fraction of tangible book. If the bank can contain its cost of risk through this cycle and produce double-digit returns on tangible equity on the other side of this crisis, shareholders would do quite well in such a scenario. That said, we point out that Europe is overtraded when it comes to banking, which pressures earnings power at even the stronger banks like BNP Paribas. We’re paying close attention to the key banking players in Europe to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19. By Matthew Warren BNP Paribas SA (BNPQF, BNPZY) reported relatively better results than many large global bank peers, … Read more

Lloyds Banking Group Navigates Competitive Markets

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Image Source: Lloyds. The UK banking market is highly competitive with too many players, and we think this is the cause for the low returns on capital across the cycle. We’re paying close attention to the key banking players in Europe, including Lloyds Banking Group, to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19. By Matthew Warren Lloyd’s Banking Group (LYG) posted a very difficult first quarter, results released April 30, with net income (IFRS equivalent of GAAP revenue) down 11% to GBP 4.0 billion and statutory profit before tax down 95% to GBP 74 million. One can see many of the highlights (or more realistically lowlights) in the graphic … Read more

Deutsche Bank Suffering From Lack of Earnings Power

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On April 29, Deutsche Bank reported another measly quarter in a long string of them. While Deutsche Bank is well-capitalized with a Common Equity Tier I ratio of 12.8% and its Investment Banking segment grew earnings nicely this quarter during rapid client trading and bond origination activity as the markets melted down in March, it suffers from a lack of earnings power at this stage. We blame this on the bank itself, but also on the overcapacity in European banking in general, which pressures margins across the entire industry. By Matthew Warren On April 29, Deutsche Bank (DB) reported another measly quarter in a long string of them, with revenue in the first period of 2020 flat at EUR 6.350 … Read more

Santander Remains Well-Capitalized

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Europe is overbanked with too much capacity, which means little or no earnings power for many of the players involved, including Santander Europe. We’re paying close attention to the key banking players in Europe to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19. By Matthew Warren Banco Santander (SAN) reported tough first-quarter results April 28, with total income (the IFRS equivalent of GAAP revenue) down 2% and attributable profit down 82% to EUR 331 million. Profit before the provision build would have been up 1%, so clearly the expectations for upcoming bad debts are what really sunk the quarterly results, which one can see in the below graphic. Image Source: Santander … Read more

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?

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Image Source: Value Trap: Theory of Universal Valuation From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as … Read more

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?

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Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that … Read more