European banks

[Spekulatius]

I have been looking at European banks recently. Not all of them are sick dogs like DB. I found some fairly strong looking and reasonably cheap business there. Here is an excellent article about Lloyd’s (LYG), which also has an interesting chart in it that covers  other European banks:

 

https://seekingalpha.com/article/4166898-lloyds-cheapest-high-performing-developed-market-bank

 

Danske Bank

 

book value: ~165 DKK

share price :~ 212 DKK

Earnings:~20DKK

 

ROE: 13-15%

 

I noticed that they have high notional leverage (equity is 145M DKK and total balance sheet is 3.54B),but a lot of these are mortgages.  It sure if these are guaranteed or not, may be John can help out? NIM is below 1%, but high leverage enables satisfactory ROE. Unless I understand, why this leverage is “safe”, I wouldn’t touch it.

 

LYG

 

Book value: ~55p

Share price ~ 66p

Earnings ~ 7 p

 

LYG is probably the best managed Uk bank, they have negligible investment banking activities if any. NIM is close to 3%,I was surprised to see it that high because when I looked at it a while ago, it barely above 2%. Potential issues with Brexit exit need consideration.

 

SVNLY

book value: 70 SEK (?)

share price : 98 SEK

earnings 8.5 SEK

ROE ~12%

 

This bank has shown very consistent performance for the last 10 years, NIM is <1%, but thr bank is rated AA and apparently assets are very safe. Banking model seems similar to Danske. share price has been weak recently due to slightly lower Earnings. They have distributed a lot of dividends, typically 65% of their earnings and yet still managed to grow their business. ROE is ~15% in Sweden, but lower elsewhere (Nederland, GB, Ireland). This stock looks somewhat less favorable due to high Swedish dividend withholding tax of 30%, which together with the high dividend, penalizes shareholder in the US.

 

https://danskebank.com/-/media/danske-bank-com/file-cloud/2018/4/interim-report---first-quarter-2018.pdf

 

https://www.handelsbanken.se/shb/inet/icentsv.nsf/vlookuppics/investor_relations_en_q-reports_hb_2017_eng_annualreport/$file/hb_2017_eng_annualreport.pdf

 

I hope to get some discussion going, because I am sure that there are some gems to be found. Some of these banks look cheaper than Us counterparts right now.

[John Hjorth]

Thank you for starting this topic, Spekulatius,

 

I'm almost getting carried away, really not knowing where to start, or to end. [ : - ) ]

 

So I'll just start here with your question about Danske Bank A/S, and the mortgage lending activities within the Danske Bank Group. [To be totally honest, I'm pretty amazed about how you're able to - within most likely limited time - to get to the crucial points - even while I know for a fact that you're a CoBF member with a lot of investing experience.]. The place to start seems to me to be on Wikipedia: Mortgage industry of Denmark. I have over the years read many places, that this system is somehow world wide considered unique. As far as I know, there has never been a default on a Danish mortgage bond. The market for Danish mortgage bonds is - relatively speaking - large, liquid and fairly efficient. All mortgages are with recourse to the debtor. [Don't even think that that you can put your home in a real estate company owned by yourself and with you as the only tennant, unless you're very rich - or you'll be asked for personal guarantee.] There are as far as I know no exeptions for this term. The bonds are non-callable, unless in case of default. [None so far.]

 

The mortgage lending activities within the Danske Bank Group takes place in the wholly owned subsidiary called "Realkredit Danmark A/S". [Can best be translated to "Mortgage Denmark A/S".]

 

You find the financials for Realkredit Danmark A/S here.

 

So, the short answer here to your question is: The leverage within the Danske Bank Group related mortgage lending is non-callable, which makes it sticky. [in the meaning, if you're long Danish mortgage bonds, and want out for whatever reason, your only option is to sell in the market - There is no way to call them.]

 

[Pretty simplified explanation here.]

[Spekulatius]

I realized that LYG isn’t as cheap as it looks. The reasons is that th statuary returns are much less than thr opereting returns.

 

Two items make a large difference

 

PPI and other provisions: PPI provisions were ~1.6B £ / year and other provisions were 800M£ . Those suck of roughly 30% of the opereting earnings. Then there is a pension deficit of roughly $7B£, which is 15% of thr equity base. It looks like Uk regulators are pretty keen on closing shortfall (unlike in the  US), they have to to pay increasing amount into the run maxing out at 1.3B£/ year to eliminate the gap. If you just look statuary returns, the earnings/share are 4.4p, and then a 66p share price does not look cheap.

 

I briefly looked at Barclays, which trades far below book. The 2017 shareholders letter is quite honestly depressing. All the profits during the last 6 years (35B£ roughly ) went to litigation and conduct charges, non core losses (from runoff business) , taxes and losses on disposals. zero value created for shareholders. When will it end? Even the CEO doesn’t know.

 

I feel that the skandinavian banks have more promise.

[John Hjorth]

Spekulatius,

 

I just noted, that this topic is developing in the investment ideas forum. To me, it's just not the right place, as I see things. We already have topics in the investment ideas forum for Lloyds and Barclays, to discuss these investments, separately. At least to me, they are both worth time and effort to study and to discuss from an investment perspective & angle.

 

I have no position in any of them as of right now, but I'm actually absolutely hell bent to study them, going forward, short term, to learn something. [said: Untill I [again!] get distracted by the next European gem trading at a P/E at 30 [or perhaps above!], that I study [please read: LVMH], instead of just moving on!].

 

I have no position on Danske Bank A/S - but I happen to have an opinion on that, from an investment angle. I'm just not the right guy to open the topic here on CoBF, because I'm bearish [to some extreme extent] to the bank's exposure to Danish farming.

 

With regard to Svenska Handelsbanken AB, I would feel inclined to open a separate topic about it, if you want, in the investment ideas forum. Actually, right now I hold it three ways:

 

1. Directly, long term,

2. Indirectly, via holding a position in Industrivärden AB, long term, [about 21 percent of Industrivärden AB equity is this stock].

3. Indirectly, via holding L. E. Lundbergföretagen AB long term, [about 5.8% of L.E. Lundberg equity is this stock, and at the same time L. E. Lundbergföretagen AB is holding 18.9 percent of Industrivärden AB].

 

- - - o 0 o - - -

 

I hold Svenska Handelsbanken AB [directly] primarily in tax deferred accounts. The Swedish dividend withholding tax that I'm subject to, is 15 percent, not 30. [in Danish tax deferred accounts, I get credit for 15 percent dividend taxes paid abroad in Danish PAL-tax, based on marked to market evaluation on each separate account, at the moment at 15.3 percent.]

[John Hjorth]

I'm sorry for double posting here,

 

To get to the point, Spekulatius, you should move this topic to the General Discussion forum, and we could then take it from there.

[rb]

As a general idea I like Scandinavian banks. Maybe I feel comfortable with them because Scandinavian banking is very similar to Canadian banking in my view. You have a nice oligopoly which allows a few players to earn nice returns. The banks are generally pretty good and well run but you have one of them that's like the retarded cousin. In Canada that's CIBC, i forget which one is the Scandinavian one. But generally the banks are conservative and well run.

 

But, here's the problem. In these countries you have real estate prices and what are essentially bubble levels. On top of that the household sector is levered up like crazy. So you have all the right ingredients for a credit crisis. I don't think John's point that no Danish mortgage bond ever defaulted is relevant either. That's because the mortgage is the last thing you default on. So even if you don't see a big spike in mortgage defaults, the banks can rack up enough defaults in their other business lines to make owning them a very bad experience.

 

This would also not be unprecedented. In the early 90 Scandinavian countries had themselves a nice big financial crisis. Though Denmark was less affected than the others. So life for John wouldn't have been as bad as for a guy named Sven. Basically all the banks went to zero.

 

In this environment at the very least the future growth rate will be lower than in the past. Simply because households can't keep levering up at the rate they've done in the past. But an investment in the Scandinavian banks is essentially a bet on Scandinavian real estate. If the real estate market hold up you'll do well owning the banks. If it doesn't you'll have a very bad experience. That's not a bet I'm looking to make. However if real estate prices and household debt were 30%-40% below current levels I'd gladly buy Scandinavian banks.

[cubsfan]

I own one UK bank in size - Metro Bank - which I started buying 6 months ago, it's now a large position for me.

In my top 5 anyway. It's a growth story, as deposits have grown at an enormous rate since 2010. My view, MTRO has multi bagger potential. COB is Vernon Hill - same CEO who grew New Jersey based Commerce Bank from 1 branch to 455 branches before selling to TD Bank for $8.5B in 2007.  It's a simple, but hard to execute growth model that can go a long way due to Metro's ability to gather deposits rapidly.

[John Hjorth]

DR: Theme : Money laundering in Danske Bank.

 

Please feel free to read -  all over.

 

What do you read?:

Is recent management at risk?

What do you think will happen going forward?

[Spekulatius]

DR: Theme : Money laundering in Danske Bank.

 

Please feel free to read -  all over.

 

What do you read?:

Is recent management at risk?

What do you think will happen going forward?

 

I read some German articles about the case. Looks like a systemic breakdown of anti money laundry systems caused by a management that seem to discourage to destination bad news upstream.

 

Given this, I am surprised that thet the shares have held up as well as they do, If they had business in the US, they would be in massive trouble and look at hundred millions and probably billion $ in fines. I think the ECB does not wield these huge fines, but there still are going to be consequence. The danish regulators can’t let this slide either, even if they wanted to, because the world and the danish populace is watching apparently.

[John Hjorth]

DR: Theme : Money laundering in Danske Bank.

 

Please feel free to read -  all over.

 

What do you read?:

Is recent management at risk?

What do you think will happen going forward?

 

I read some German articles about the case. Looks like a systemic breakdown of anti money laundry systems caused by a management that seem to discourage to destination bad news upstream.

 

Given this, I am surprised that thet the shares have held up as well as they do, If they had business in the US, they would be in massive trouble and look at hundred millions and probably billion $ in fines. I think the ECB does not wield these huge fines, but there still are going to be consequence. The danish regulators can’t let this slide either, even if they wanted to, because the world and the danish populace is watching apparently.

 

That's to me an accurate analysis, Spekulatius. I think the most important thing is that this is actually now contained, in the menaing those particular activities are long time ago shut totally down. A fair assessment of the whole story boils down to what ShaperDingaan has told us many times here on CoBF: Bankers are a weird combination of hethens and prostitutes.

 

Personally, I think the competence to fine Danske Bank is at the Danish regulators [called Finanstilsynet], not ECB, however, I'm not sure of that. The fines for non-compliance are ridiculous here, compared to what has been going on in the US.

 

An enormous dent in the reputation of the bank, and I'm quite sure, that Finanstilsynet really feels the public pressure here, too.

 

- - - o 0 o - - -

 

I'm not trying to derail the topic here, there is just one more thing that comes to mind here:

 

Nordea is now in exact the same situation. It blew up in the face of Nordea CEO Casper von Koskull Wednesday or Thursday evening last week on DR. The bank has delivered about DKK 1 B to approx. 10 [i think it actually was 11 or 13] forex shops in Copenhagen in EUR 500 notes, where people has delivered DKK notes in exchange for those EUR notes. The forex shops are all located nearby Pusherstreet in the alternative society called Christiania in Copenhagen, from where a major part of pot in Denmark is traded and distributed. A few of those forex shop owners are already behind bars for non-compliance with AML-regulations.

 

- "Risk free" forex trading commisions!! [ ; - ) ]

[John Hjorth]

At least partly related to this topic:

 

Financial Times : UniCredit seeks merger with SocGen.

 

Personally, I have never looked at any of those two banks. Just posting it to share. It's actually the first time I have read that material bank consolidation cross border in Europe has been under consideration recently. Barclays - ref. the content of this topic so far - is also mentioned in the article.

[John Hjorth]

I'm copying and quoting Spekulatius from the BAC topic here, because it's absolutely worth it, to me. I coulden't in any way phrase it better myself, with regard to the nuances in investing in European banks:

 

I think one must distinguish between the impact of the Great Recession and reforms on banks vs individuals. It is now clear that the ECB didn’t get the banking system reformed correctly, causing a dwelling crisis. Depending on location and country, the impact was quite felt different.

 

In Germany, the global financial crisis was felt as a swift decline followed by a quick recovery. As early as 2009, the Recession was over, wealth effect was negligible, because most Germans don’t own stock and real estate didn’t go down much at all. That is why so many Germans have difficulty to understand why other have a problem. There is very little symphaty for people, institutions or countries who borrow and then get into problems. Whether than is a correct viewpoint is an entirely different matter. It also doesn’t matter to the average German , if Deutsche  Bank goes to the crapper - deposits are insured and the banking systems backbone Sparkassen and Volksbanken (owned by local government or mutual organization).

 

 

This is very different from individuals who love in Ireland, Spain, Italy or worst of all Greece, who live now through a decade of economic stagnation (Spain is actually recovering nicely). I feel the ECB with their politic keeps the banking System afloat, but also keeps it from mending itself, which makes it a difficult sector to invest in. I do think that a selloff because of Italy will probably be a buying opportunity (except for Italian banks), since I think foreign banks have abstained from buying Italian treasuries after the first crisis a couple of years ago. So, maybe there is an opportunity to Maske a nice trade in the near term future.

[jouni1]

there's an extraordinary amount of leverage in at least finnish real estate investing right now. Condos are being sold with 30% money down, and the debt is at the "building" level, not personal debt of the investors. the credit-worthiness of the buyers is not really checked at all if they can manage the down payment. first few years you pay only the interest on these loans.

 

sound familiar?

 

nordea was the first to introduce some limits to these loans given to the housing coops(? not sure about the term) a week or so ago.

[Spekulatius]

At least partly related to this topic:

 

Financial Times : UniCredit seeks merger with SocGen.

 

Personally, I have never looked at any of those two banks. Just posting it to share. It's actually the first time I have read that material bank consolidation cross border in Europe has been under consideration recently. Barclays - ref. the content of this topic so far - is also mentioned in the article.

UniCredit has a history of cross country mergers - in 2005, they bought thr mostly Bavarian Hypovereinsbank (once a blue chip bank) in Germany. I don’t think this merger can be advertised as a success though.

[John Hjorth]

Old news, but worth posting in my opinion, to shed some light on the sentiment on this side of the Atlantic Ocean about particulary European banks:

 

Financial Times [June 13^th 2018]: Big banks slip into bear market territory as rates rise.

[Spekulatius]

Old news, but worth posting in my opinion, to shed some light on the sentiment on this side of the Atlantic Ocean about particulary European banks:

 

Financial Times [June 13^th 2018]: Big banks slip into bear market territory as rates rise.

 

There was a blowout rise in most bank stocks that topped in January 2018, that wasn’t really justified by any fundamentals that I can see. If you discount that, the bear market argument looks quite weak.

[John Hjorth]

There was a blowout rise in mist bank stocks that topped in January 2018, that wasn’t really justified by any fundamentals that I can see. If you discount that, the bear market argument looks quite weak.

 

To me, true. Thanks Spekulatius.

[John Hjorth]

...I have no position on Danske Bank A/S - but I happen to have an opinion on that, from an investment angle. I'm just not the right guy to open the topic here on CoBF, because I'm bearish [to some extreme extent] to the bank's exposure to Danish farming. ...

 

Here we go : The [Danish] agriculture asks for help to handle the drought.

 

Extreme drought within the last two months here. National prohibition of all kinds of fire in the open as of today. [You are allowed to use ie. your coal based Weber grill, if you have it on ground, that cannot burn, with good distance to your yellow lawn etc.] I have never experienced drought like this before in my whole life.

 

- So, now all those crazy guys, operating with a lot of leverage, no earnings, no real cash flow from operations, and no liquidity margin of safety "for a rainy day" [<- Sorry, I coulden't help it!] think it's all other Danish persons' problem, that they have gone all in with perhaps DKK 100 M in leverage in a highly cyclical business, that is now also to some extent hit by what could be considered a Black Swan event. [Pork prices has been on a downward trend recently, too.] Owners of Danish wine yards [yes, there are some], on the other hand, can't get their arms down.

 

Today I'm so happy that I passed some time ago on DAB.CPH. This will get really messy. The total debt in Danish agriculture [banks and mortgage institutions] is  ~DKK 350 B.

[John Hjorth]

Bloomberg [July 3^rd 2018]: Danske Bank's Money Laudering Tops $8 Billion, Browder Says.

 

There is now an enormours pressure on the bank and the Danish FSA, and it reaches all the way up to the government. This is not ordinary daily cooking here in tiny Denmark.

[Jurgis]

This is really funny.

 

It appears I should have posted http://www.cornerofberkshireandfairfax.ca/forum/books/red-notice-bill-browder/ here instead of in

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/sbrcy-sberbank/10/ thread...  8)

[John Hjorth]

Jurgis,

 

I think your link is very well placed both here and there.

 

I actually skipped your post in the SBRCY topic, but did not ignore it. It was about if we started with that, in the SBRCY topic it would just be "Hello SBRCY! - ... and goodbye."

 

I realize now that was quite rude behavior for my part, and I apologize for that.

 

I never ignore your posts, actually. Please remember I constitute a material part of your audience. I would also say, that I appreciate being valued,  furthermore I'm also a very loyal and devoted crowd. When you update your blog late after each month end, I get symptoms. It starts with cold sweat, then I start to shake, I get depressed, and end up almost suicidal to get rid of the symtoms, untill the monthly blog post finally is up! [ : - ) ]

 

... BTW, you're the only person reading my blog. Thanks for being valued member of the audience.

 

- - - o 0 o - - -

 

Now back to European banks.

[Jurgis]

I never ignore your posts, actually. Please remember I constitute a material part of your audience. I would also say, that I appreciate being valued,  furthermore I'm also a very loyal and devoted crowd. When you update your blog late after each month end, I get symptoms. It starts with cold sweat, then I start to shake, I get depressed, and end up almost suicidal to get rid of the symtoms, untill the monthly blog post finally is up! [ : - ) ]

 

LOL.

 

Now I feel responsible for your well-being.

 

Drink a lot of fluids, don't travel to Russia for investing, and don't buy BRK CFDs.  8)

[Sportgamma]

A few thoughts on a special situation bank stock in Iceland (it does come with is a Swedish Depository Note): [iurl=https://fundamentalfinanceplaybook.com/2018/07/29/the-arion-bank-ipo-and-what-happens-after/]The Arion Bank IPO and what happens after[/iurl]

 

[Spekulatius]

ING is down 4% today to $12.8 - any idea what the cause might be. There was news about a fine for money laundering (~780M€), but that was a coupe of days ago.

 

LYG trades at  58p now with tangible book at 53p. That’s a stock I set my eye on, since it’s a good franchise, IMO. I do think that a hard Brexit is now quite likely and Gb will probably go into a recession after that. Bank stocks are basically macro bets, so I am not sure we are “there” yet.

[NewbieD]

Danske is now at 167 DKK, down from 212 at the start of this thread on uncertainty on money laundering.

 

Starting to look cheap even on sizable fines? Just under P/B 1 and earnings have been 20 DKK / year recently. I bought a small position today. Might be early, mostly to follow it and go in with size if uncertainty lifts and price remains here and/or there is a share issue much lower after hefty fines. I'm not necessarily long term invested. I read one analyst estimating the fines to be 3-5 BDKK, another up to 40 billion DKK (~5-6 billion USD).