We are in the middle of the Q1 earnings season. Last week, a number of large European banks reported, including portfolio positions Santander, Deutsche Bank and Natwest.
$SAN.MC (Banco Santander SA) posted good numbers on Tuesday. The bank’s profit topped estimates, and it confirmed 2023 guidance. The shares fell 6%, however, as investors did not like a fall in profits in the bank’s North and South American units. We view this as an overreaction and continue to hold the shares, which trade at an extremely attractive valuation of 5x 2024E earnings. Before the pandemic, the bank was valued at 8x earnings, which suggests 60% upside may be available.
$DBK.DE (Deutsche Bank Aktiengesellschaft), a riskier holding, reported on Thursday. Deutsche’s earnings were important because the bank had faced a speculative attack against its creditworthiness in March, and investors were waiting to see what collateral damage the Silicon Valley Bank collapse might have caused. It was a relief therefore that the numbers were good. Deutsche’s turnaround remains on track and the shares trade at a depressed valuation of only 5x 2024E earnings. If the turnaround succeeds, 50-100% upside will be available over the next couple of years.
$NWG.L (Natwest Group PLC) ended the earnings week on Friday. The bank reiterated its 2023 guidance, but the numbers were somewhat softer than expected on interest income. We view the shares as chronically undervalued, given that they trade at 5x 2024E earnings and a 7% dividend yield, despite the bank’s high profitability (~15% ROTE). A normal bank is valued at 10x earnings, and Natwest is very far from that level today.
Overall, “investors still view Europe’s banks with a mixture of skepticism and indifference.”
Such skepticism was justified in the past decade because European banks were unprofitable. That has changed with higher interest rates. Yet valuations continue to languish at levels that would be justified only if another European financial crisis was around the corner.
We believe these low valuations create an opportunity and continue to overweight European banks in the portfolio.