Community Banks and French Regional Banks

[Guest hellsten]

While reading the latest 13F from the Kahn Brothers, I noticed they own quite a few community banks. I knew basically nothing about community banks, so I decided I would investigate why community banks might be a good investment.

 

The Walker’s Manual of Community Banks Stocks has this to say about community banks:

 

Community banks are vital to the growth and prosperity of our towns and cities. Walker’s Manual of Community Banks Stocks culls through the community banks across this great country to find some of the best. We believe that early discovery of these banks is an integral part of gaining a high return on your investments.

 

The typical community bank starts small by issuing around a million shares to local business persons, usually at $10 per share. Over time the community bank grows, reinvests its profits back into its operations and establishes additional offices. Eventually it matures and begins to pay dividends, or it buys other banks, becomes listed on an exchange, or sells to one of the larger banks. The end result is a business that serves its local community and when purchased at the right price provides a good return to its shareholders.

 

Nate at oddball stocks recently wrote about community banks and why he thinks they are attractive investments:

http://www.oddballstocks.com/2013/02/a-banking-primer.html

 

A lot of stocks trade below TBV due to management mis-deeds, or the inability of a company to earn their cost of capital.  I believe the reason for bank cheapness now is different, we just went through a banking crisis and banks are still considered toxic investments.  Beyond this the market has lost interest in smaller community banks conduct the boring business of gathering assets and re-loaning the money.  Many of these community banks emerged from the crisis unscathed, and in a lot of cases overcapitalized and trading at incredibly low valuations.  Unfortunately market psychology doesn't care much about this, the banks are still considered risky.

 

There is a good discussion after the article.

 

Anyway, I'm still learning and trying to understand these stocks and since there is not a lot of information on them I thought I would start a thread…

 

If someone is interested, here's a list of a few French regional banks and some basic information:

 

CRAV - Crédit Agricole Atlantique Vendée

 

http://quotes.morningstar.com/stock/s?t=CRAV&region=FRA

http://www.macroaxis.com/invest/market/CRAV.PA--fundamentals--Crcam_Atlantique_Vendee

http://www.info-financiere.fr/upload/ECO/2013/01/FCECO028556_20130129.pdf

 

P/E 4.8

P/B 0.24

ROE 5.12

ROA 0.57%

Dividend 7.7%

Average 3-month volume 6 872 shares/day

 

CRAP - Crédit Agricole Alpes Provence

 

http://financials.morningstar.com/balance-sheet/bs.html?t=CRAP&region=FRA&culture=en-us

http://www.info-financiere.fr/upload/CNS/2013/02/FCCNS115498_20130208.pdf

http://www.macroaxis.com/invest/market/CRAP.PA--fundamentals--Caisse_R

P/E 4.5

P/B 0.21

ROE 4.83%

ROA 0.54%

Average 3-month volume 5 783 shares/day

 

CRSU - Crédit Agricole Sud-Rhône-Alpes

http://financials.morningstar.com/income-statement/is.html?t=CRSU&region=FRA&culture=en-us

http://bourse.lesechos.fr/bourse/synthese.jsp?code=FR0000045346&place=XPAR&codif=ISIN

 

Average 3-month volume 4 793 shares/day

 

CCN - Crédit Agricole de Normandie Seine

http://quotes.morningstar.com/stock/s?t=CCN&region=FRA

http://www.info-financiere.fr/upload/CNS/2013/02/FCCNS115865_20130227.pdf

 

Average 3-month volume 10 085 shares/day

 

CAT31 - Caisse Regionale de Credit Agricole Mutuel Toulouse 31

http://quotes.morningstar.com/stock/s?t=CAT31&region=FRA

 

Average 3-month volume 10 000 shares/day

 

Many more can be found here:

http://valueetdividende.canalblog.com/archives/2012/07/17/24727247.html

 

Company filings can be found here:

http://www.info-financiere.fr/

http://www.amf-france.org/inetbdif/sch_cpy.aspx?lang=en

 

For U.S. banks I found these resources in the discussion thead at oddballstocks.com:

http://bankregdata.com/bkHm.asp?inst=HC3030307

http://www.depositaccounts.com/banks/landmark-national-bank.html

 

There's also a book "Analyzing and Investing in Community Bank Stocks.pdf" that can be found on csinvesting.org:

http://csinvesting.org/2012/10/15/value-vault-for-books-a-more-focused-blog-on-investing/

[constructive]

http://en.wikipedia.org/wiki/Cr%C3%A9dit_Agricole

 

"Crédit Agricole S.A. is majority owned by 39 French co-operative retail banks, Caisses Régionales de Crédit Agricole Mutuel."

 

It is an unusual structure which may explain the low valuations.

[oddballstocks]

The french banks are even more attractive then the stats make them out to be.  They're essentially MHC's so you need to strip out those shares to get the true value, equity is understated.  A few have been acquired at 80% of BV over the past five years which would be a 4x return from here.

 

I have debated endlessly on buying these.  I've read the statements, gone back and forth on it, talked to people in France yet never pulled the trigger.  A few things got in the way.  The first is I have no idea if they're making good loans or not.  The banks appear conservative yet out of no where they'll suddenly do a giant loan markdown.  The detail on loans isn't that great, and I believe lending is fairly concentrated.  A number of years back the Bordeaux branch took a giant hit when the wine industry hit the skids.

 

The second factor and more important factor is beyond the local lending.  Local lending can only soak up a portion of the deposit base at these regional banks, so the banks in turn lend out their balance sheets to the main Credit Agricole bank.  Credit Agricole's cheap funding comes from the regional banks.  It's worth reading the financial statements of CA, and once you do that this looks a lot less rosy.  Credit Agricole has both feet on banana peels and losses could be sizable.  Would that mean a hit to the regional banks if CA couldn't raise equity to fill the gap?  Could CA be in a situation where they couldn't fully pay back the regional deposits? 

 

Once I started to haircut the money lent to CA and look at the loss potential for French real estate these things drop in attractiveness.  I came to the conclusion that I'd rather just buy US banks, where the French ones could return 2-4x they were hard to decipher and not as transparent as US banks.  I can also read English better than French, and nuances are important in banking.

 

The caisse regionalles seem to be a very popular idea with the French value bloggers.  I wouldn't be surprised if some of the French investors on this board have shares as well.

[A_Hamilton]

The french banks are even more attractive then the stats make them out to be.  They're essentially MHC's so you need to strip out those shares to get the true value, equity is understated.  A few have been acquired at 80% of BV over the past five years which would be a 4x return from here.

 

I have debated endlessly on buying these.  I've read the statements, gone back and forth on it, talked to people in France yet never pulled the trigger.  A few things got in the way.  The first is I have no idea if they're making good loans or not.  The banks appear conservative yet out of no where they'll suddenly do a giant loan markdown.  The detail on loans isn't that great, and I believe lending is fairly concentrated.  A number of years back the Bordeaux branch took a giant hit when the wine industry hit the skids.

 

The second factor and more important factor is beyond the local lending.  Local lending can only soak up a portion of the deposit base at these regional banks, so the banks in turn lend out their balance sheets to the main Credit Agricole bank.  Credit Agricole's cheap funding comes from the regional banks.  It's worth reading the financial statements of CA, and once you do that this looks a lot less rosy.  Credit Agricole has both feet on banana peels and losses could be sizable.  Would that mean a hit to the regional banks if CA couldn't raise equity to fill the gap?  Could CA be in a situation where they couldn't fully pay back the regional deposits? 

 

Once I started to haircut the money lent to CA and look at the loss potential for French real estate these things drop in attractiveness.  I came to the conclusion that I'd rather just buy US banks, where the French ones could return 2-4x they were hard to decipher and not as transparent as US banks.  I can also read English better than French, and nuances are important in banking.

 

The caisse regionalles seem to be a very popular idea with the French value bloggers.  I wouldn't be surprised if some of the French investors on this board have shares as well.

 

Ick. Having covered french regional banks in a past life...seemingly no price is low enough for these institutions. Maybe Ile De France in Paris...but most of the management teams at these insitutions make US community bankers look like brilliant capital allocators. Also, while they are kind of like MHC's here, there is no real way to demutualize these things.

 

And spot on with CA...what happens to the regionals when CA has a trading blow up on their trading desk? The regionals get diluted in the cap raise. 

 

[Guest hellsten]

Thank you A_Hamilton and oddballstocks for sharing your thoughts. Valuing the French regional banks would be close to impossible for me, so I would probably buy a basket of them if the market heads south again. There's no hurry to buy them as there are plenty of unresolved issues in Europe that will come back to haunt the banks. One of the issues could be the real estate prices in France:

 

http://www.thebubblebubble.com/wp-content/uploads/2012/02/481139Capturedcran20111209145549.png

http://www.globalpropertyguide.com/real-estate-house-prices/F#france

 

The European housing markets seem to defy gravity. I guess they just can't believe what happened in the U.S. can happen to them, but maybe it really is different this time :)

[rijk]

another similar risk is related to the european sovereign debt crisis, CA has significant exposure to southern european countries, not only through sovereign debt holdings but they also have significant amounts in loans outstanding to italian businesses

 

regards

rijk

[alwaysinvert]

The french banks are even more attractive then the stats make them out to be.  They're essentially MHC's so you need to strip out those shares to get the true value, equity is understated.  A few have been acquired at 80% of BV over the past five years which would be a 4x return from here.

 

I have debated endlessly on buying these.  I've read the statements, gone back and forth on it, talked to people in France yet never pulled the trigger.  A few things got in the way.  The first is I have no idea if they're making good loans or not.  The banks appear conservative yet out of no where they'll suddenly do a giant loan markdown.  The detail on loans isn't that great, and I believe lending is fairly concentrated.  A number of years back the Bordeaux branch took a giant hit when the wine industry hit the skids.

 

The second factor and more important factor is beyond the local lending.  Local lending can only soak up a portion of the deposit base at these regional banks, so the banks in turn lend out their balance sheets to the main Credit Agricole bank.  Credit Agricole's cheap funding comes from the regional banks.  It's worth reading the financial statements of CA, and once you do that this looks a lot less rosy.  Credit Agricole has both feet on banana peels and losses could be sizable.  Would that mean a hit to the regional banks if CA couldn't raise equity to fill the gap?  Could CA be in a situation where they couldn't fully pay back the regional deposits? 

 

Once I started to haircut the money lent to CA and look at the loss potential for French real estate these things drop in attractiveness.  I came to the conclusion that I'd rather just buy US banks, where the French ones could return 2-4x they were hard to decipher and not as transparent as US banks.  I can also read English better than French, and nuances are important in banking.

 

The caisse regionalles seem to be a very popular idea with the French value bloggers.  I wouldn't be surprised if some of the French investors on this board have shares as well.

Have you looked at Danish banks? I have some small positions there. Denmark to me is much easier to stomach than France and they could always decouple from the Euro. And the banks seem really cheap.

[Phaceliacapital]

Interesting thread, will read up during the weekend

[fishwithwings]

Do the french banks post their financial reports in English?

[oddballstocks]

Do the french banks post their financial reports in English?

 

No, the reports are in French.

[fishwithwings]

Do the french banks post their financial reports in English?

 

No, the reports are in French.

 

Nate,

You seem like the go-to guy for regional banks...  What are your thoughts on CRCAM banks since your post in '13?

Thanks!