Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

We take a look at a sample of European banks at Q119, and score them by financial strength (FUN), by trends and value-quality (PH Score) and by valuation (VAL).We do not include a number of French and UK lenders on account of incomplete quarterly data but include some restated Italian financials. Where we have sufficient data, we carry out this ranking process and try to give a broad feel for opportunity and risk in the region. There are many others that we could have included.We also wanted to see how Greek banks stand up relative to European peers. See <a href="https://www.smartkarma.com/insights/piraeus-bank-risky-but-too-cheap" target="_blank" data-smartkarma-citation="insights:30201">Piraeus Bank: Risky but Too Cheap</a>, <a href="https://www.smartkarma.com/insights/eurobank-battle-hardened-and-transformation-bound" target="_blank" data-smartkarma-citation="insights:28612">Eurobank: Battle-Hardened and Transformation Bound</a>. The same can be said of EM favourite, <a href="https://www.smartkarma.com/entities/sberbank-of-russia-pjsc" target="_blank" data-smartkarma-citation="entities:24142:1">Sberbank Of Russia Pjsc (SBER LI)</a> , which is currently in the bottom decile of our VFM rankings. See <a href="https://www.smartkarma.com/insights/sberbank-the-beast-from-the-east" target="_blank" data-smartkarma-citation="insights:18727">Sberbank: The Beast from the East</a> when the lender was arguably a more attractive proposition.For further detail and granularity on a number of the banks evaluated here, we would steer folks towards <a href="https://www.smartkarma.com/insights/italian-banks-m-a-the-complex-italian-job" target="_blank" data-smartkarma-citation="insights:30383">Italian Banks M&amp;A - The Complex Italian Job</a> by <a href="https://www.smartkarma.com/profiles/victor-galliano" target="_blank" data-smartkarma-citation="accounts:3251">Victor Galliano</a> and <a href="https://www.smartkarma.com/insights/hsbc-a-thin-veil" target="_blank" data-smartkarma-citation="insights:29648">HSBC – A Thin Veil</a> by <a href="https://www.smartkarma.com/profiles/daniel-tabbush" target="_blank" data-smartkarma-citation="accounts:12">Daniel Tabbush</a>. CP has written previously about the upside and downside of <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> and we feel that <a href="https://www.smartkarma.com/profiles/victor-galliano" target="_blank" data-smartkarma-citation="accounts:3251">Victor Galliano</a> provides the necessary expertise on this lender today as well as equally LATAM-heavy <a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1">Banco Santander Sa (SAN SM)</a>. Some of the LATAM entities appear to be reporting pretty benign trends. Our colleague, <a href="https://www.smartkarma.com/profiles/ercan-uysal" target="_blank" data-smartkarma-citation="accounts:2911">Ercan Uysal</a>, has some interesting insights into Turkish exposure at HSBC, BBVA, and others.We only include one Scandinavian lender. We have been cautious on this market for a while now. See <a href="https://www.smartkarma.com/insights/nordic-banks-underperformance-or-something-more-serious" target="_blank" data-smartkarma-citation="insights:19950">Nordic Banks: Underperformance or Something More Serious?</a>  Our individual VFM rankings are not included here. But they show that a number of European banks feature in the top decile globally such as Spanish lenders, Erste Bank (not included here), and CS. From a valuation and technical (oversold) viewpoint, low growth Europe cannot be dismissed out of hand if the price is deeply below intrinsic value.Corporate activity continues to be a hot topic in Europe as well as negative rates and general Japanification scenarios. It would be instructive to hear Japanese guru, <a href="https://www.smartkarma.com/profiles/j-brian-waterhouse" target="_blank" data-smartkarma-citation="accounts:1459">J. Brian Waterhouse</a>'s views on this. Corporate activity is a response to a generally low NIM, subpar profitability, quite high LDRs and CIRs, elevated NPLs, and a stagnant monetary policy situation all within a framework of stricter capital rules and tighter regulations. However, the merging of weak entities, such as the once proposed DB-Commerzbank tie-up, would not add value. <a href="https://www.smartkarma.com/entities/deutsche-bank-ag-registered" target="_blank" data-smartkarma-citation="entities:526:1">Deutsche Bank Ag Registered (DBK GR)</a> remains the canary in the coal mine or the elephant in the room. Its fate will impact and influence the European Banking System to a large degree. The German lender certainly casts a shadow over the region's sector. Even now it has assets of $1.54 trillion, almost half Germany’s $3.4 trillion GDP. Not "too big to fail" but "far too big to fail". I wonder when someone out there in the analyst community will actually say that its too cheap to ignore...such a career bet may just be too risky.

We take a look at a sample of European banks at Q119, and score them by financial strength (FUN), by trends and value-quality (PH Score) and by valuation (VAL).We do not include a number of French and UK lenders on account of incomplete quarterly data but include some restated Italian financials. Where we have sufficient data, we carry out this ranking process and try to give a broad feel for opportunity and risk in the region. There are many others that we could have included.We also wanted to see how Greek banks stand up relative to European peers. See Piraeus Bank: Risky but Too Cheap, Eurobank: Battle-Hardened and Transformation Bound. The same can be said of EM favourite, Sberbank Of Russia Pjsc (SBER LI) , which is currently in the bottom decile of our VFM rankings. See Sberbank: The Beast from the East when the lender was arguably a more attractive proposition.For further detail and granularity on a number of the banks evaluated here, we would steer folks towards Italian Banks M&amp;A - The Complex Italian Job by Victor Galliano and HSBC – A Thin Veil by Daniel Tabbush. CP has written previously about the upside and downside of Banco Bilbao Vizcaya Argentari (BBVA SM) and we feel that Victor Galliano provides the necessary expertise on this lender today as well as equally LATAM-heavy Banco Santander Sa (SAN SM). Some of the LATAM entities appear to be reporting pretty benign trends. Our colleague, Ercan Uysal, has some interesting insights into Turkish exposure at HSBC, BBVA, and others.We only include one Scandinavian lender. We have been cautious on this market for a while now. See Nordic Banks: Underperformance or Something More Serious?  Our individual VFM rankings are not included here. But they show that a number of European banks feature in the top decile globally such as Spanish lenders, Erste Bank (not included here), and CS. From a valuation and technical (oversold) viewpoint, low growth Europe cannot be dismissed out of hand if the price is deeply below intrinsic value.Corporate activity continues to be a hot topic in Europe as well as negative rates and general Japanification scenarios. It would be instructive to hear Japanese guru, J. Brian Waterhouse's views on this. Corporate activity is a response to a generally low NIM, subpar profitability, quite high LDRs and CIRs, elevated NPLs, and a stagnant monetary policy situation all within a framework of stricter capital rules and tighter regulations. However, the merging of weak entities, such as the once proposed DB-Commerzbank tie-up, would not add value. Deutsche Bank Ag Registered (DBK GR) remains the canary in the coal mine or the elephant in the room. Its fate will impact and influence the European Banking System to a large degree. The German lender certainly casts a shadow over the region's sector. Even now it has assets of $1.54 trillion, almost half Germany’s $3.4 trillion GDP. Not "too big to fail" but "far too big to fail". I wonder when someone out there in the analyst community will actually say that its too cheap to ignore...such a career bet may just be too risky. 

European Banks at Q119: Big Banks, Greek Banks...a Quantamental Evaluation

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In additional to highlighting important technical levels across major markets, we reiterate our recommendation to add exposure to global financials, and highlight a number of attractive Financial stocks, with an emphasis on UK and European names.

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In additional to highlighting important technical levels across major markets, we reiterate our recommendation to add exposure to global financials, and highlight a number of attractive Financial stocks, with an emphasis on UK and European names. 

Global Equity Strategy: EU and UK Financial Stocks Are Attractive

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Accelerating Tomorrow’s Independent Research

Boost Research

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<ul class="">
<li>We take a contrarian bullish view on microfinance bank <a href="https://www.smartkarma.com/entities/27889" target="_blank" data-smartkarma-citation="entities:27889:1">Gentera SAB De CV (GENTERA* MM EQUITY)</a> , despite the AMLO headwinds, and a cautious stance on <a href="https://www.smartkarma.com/entities/24780" target="_blank" data-smartkarma-citation="entities:24780:1">Grupo Financiero Banorte-O (GFNORTEO MM)</a>
</li>
<li>AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues</li>
<li>Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially <a href="https://www.smartkarma.com/entities/27889" target="_blank" data-smartkarma-citation="entities:27889:1">Gentera SAB De CV (GENTERA* MM EQUITY)</a>; we believe, on a medium-term view, these concerns may be overdone</li>
<li>We would be cautious on the Mexican big cap banks, and especially <a href="https://www.smartkarma.com/entities/24780" target="_blank" data-smartkarma-citation="entities:24780:1">Grupo Financiero Banorte-O (GFNORTEO MM)</a> ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term</li>
<li>We are neutral on <a href="https://www.smartkarma.com/entities/24776" target="_blank" data-smartkarma-citation="entities:24776:1">Grupo Financiero Inbursa-O (GFINBURO MM)</a>  and <a href="https://www.smartkarma.com/entities/27672" target="_blank" data-smartkarma-citation="entities:27672:1">Banco Santander Mexico-B (BSMXB MM)</a> , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure</li>
</ul>


We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance on Grupo Financiero Banorte-O (GFNORTEO MM)

AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues
Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially Gentera SAB De CV (GENTERA* MM EQUITY); we believe, on a medium-term view, these concerns may be overdone
We would be cautious on the Mexican big cap banks, and especially Grupo Financiero Banorte-O (GFNORTEO MM) ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term
We are neutral on Grupo Financiero Inbursa-O (GFINBURO MM)  and Banco Santander Mexico-B (BSMXB MM) , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure


Mexican Banks AMLO Effect; Less Bad than Feared?

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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<div class="content-highlight">Turkish exposures are manageable, but pressure on profits is likely.</div><hr>Turkey's rapid economic growth was fuelled by a surge in credit, with Turkish banks increasing their lending books by 22% per year over the past eight years. Foreign-currency loans make up 36% of the lending book of Turkish banks, while Turkish banks rely on foreign exchange borrowings and deposits for nearly half of their funding. The recent collapse in the value of the Turkish lira threatens to topple this house of cards.Our base-case scenario is that the Turkish economy goes through a phase of painful rebalancing during which it weans itself off its reliance on foreign funding. The profitability of Turkish banks will be under substantial pressure over the medium term, and they might require capital and funding support. <a href="https://www.smartkarma.com/entities/21251" target="_blank" data-smartkarma-citation="entities:21251:1">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> and <a href="https://www.smartkarma.com/entities/21234" target="_blank" data-smartkarma-citation="entities:21234:1">UniCredit SpA (UCG IM)</a> count on Turkey for 14% and 10% of earnings, respectively, and have the most to lose under this scenario. We recently cut our fair value estimates for BBVA and UniCredit by 20% and 18%, respectively, partially due to the lower contribution we anticipate from Turkey over the medium term.We believe it is extremely unlikely that a Turkish affiliate of a European bank will fail (which would require the parent to write off its exposure), as the Turkish affiliate banks can count on liquidity and capital support from their European parents. However, it is exactly this implicit support that drives our downside scenario. We are concerned that the European banks will support discounted capital calls to keep their Turkish affiliates afloat and safeguard their full Turkish exposure. European banks that provide significant liquidity and funding support to their Turkish affiliates will have even less of an option to walk away from their investments, given the magnitude of their exposure. UniCredit especially stands out in this regard: While its equity participation in <a href="https://www.smartkarma.com/entities/25062" target="_blank" data-smartkarma-citation="entities:25062:1">Yapi Ve Kredi Bankasi As (YKBNK TI)</a> is equal to 5% of its consolidated equity, we estimate that funding and liquidity support increases its full Turkish exposure to as much as 20% of its equity.Analyst: Johann Scholtz, CFA

Turkish exposures are manageable, but pressure on profits is likely.Turkey's rapid economic growth was fuelled by a surge in credit, with Turkish banks increasing their lending books by 22% per year over the past eight years. Foreign-currency loans make up 36% of the lending book of Turkish banks, while Turkish banks rely on foreign exchange borrowings and deposits for nearly half of their funding. The recent collapse in the value of the Turkish lira threatens to topple this house of cards.Our base-case scenario is that the Turkish economy goes through a phase of painful rebalancing during which it weans itself off its reliance on foreign funding. The profitability of Turkish banks will be under substantial pressure over the medium term, and they might require capital and funding support. Banco Bilbao Vizcaya Argentari (BBVA SM) and UniCredit SpA (UCG IM) count on Turkey for 14% and 10% of earnings, respectively, and have the most to lose under this scenario. We recently cut our fair value estimates for BBVA and UniCredit by 20% and 18%, respectively, partially due to the lower contribution we anticipate from Turkey over the medium term.We believe it is extremely unlikely that a Turkish affiliate of a European bank will fail (which would require the parent to write off its exposure), as the Turkish affiliate banks can count on liquidity and capital support from their European parents. However, it is exactly this implicit support that drives our downside scenario. We are concerned that the European banks will support discounted capital calls to keep their Turkish affiliates afloat and safeguard their full Turkish exposure. European banks that provide significant liquidity and funding support to their Turkish affiliates will have even less of an option to walk away from their investments, given the magnitude of their exposure. UniCredit especially stands out in this regard: While its equity participation in Yapi Ve Kredi Bankasi As (YKBNK TI) is equal to 5% of its consolidated equity, we estimate that funding and liquidity support increases its full Turkish exposure to as much as 20% of its equity.Analyst: Johann Scholtz, CFA

European Banks: Little Delight From Turkey

Equity Bottom-Up

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares.
<div class="content-highlight">
VFM is simply Value, Fundamentals, and Momentum.
</div>
<ul>
<li>For value, we utilise a franchise valuation based on the market pricing of the funding base.</li>
<li>For fundamentals, we incorporate our PH Score - a value-quality score based on financial metric change/momentum.</li>
<li>For Momentum, we prioritise a negative RSI.</li>
<li>The last filter relates to a default probability score where each bank is assigned a risk ranking.</li>
</ul>
We simply rank each of the four screens to arrive at an overall ranking. We are on the hunt for cheap assets which are neglected by the market - sometimes for a very good reason, sometimes unfairly so. 
<div class="content-highlight">
So what are the conclusions of our VFM screen?
</div>
<ul>
<li>There are opportunities and traps (HSBC and DBS?) from all jurisdictions in quintile1.</li>
<li>European lenders with greater EM exposure feature.</li>
<li>UK and Austrian banks stand out. The latter again marked by EM exposure.</li>
<li>Japan and European banks in general have low valuations.</li>
<li>US banks carry a lower level of risk.</li>
<li>Some MENA (Saudi Arabia and Jordan for example) and Greater China banks are included.</li>
<li>Moving up the risk ladder, South Korean, Russian, and Turkish banks stand out. With regards the latter, there is a real concern that the fundamental metrics will deteriorate before very long. In fact, some can argue that this is already happening. But there is a price for everything and assets can get beaten up excessively by the herd. Sanction-sodden Turkey and Russia are intriguing on a five year timeframe or from a trading perspective. </li>
<li>There are number of banks featured in the quintile that we have written about such as <a href="https://www.smartkarma.com/entities/341" target="_blank" data-smartkarma-citation="entities:341:1">Bank Of East Asia (23 HK)</a>, <a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">Sberbank Of Russia, </a><a href="https://www.smartkarma.com/entities/27001" target="_blank" data-smartkarma-citation="entities:27001:1">Emirates NBD PJSC (EMIRATES UH)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/12843" target="_blank" data-smartkarma-citation="entities:12843:1">Hana Financial (086790 KS)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/11841" target="_blank" data-smartkarma-citation="entities:11841:1">Woori Bank (000030 KS)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/21251" target="_blank" data-smartkarma-citation="entities:21251:1">Banco Bilbao Vizcaya Argentari (BBVA SM)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, </a><a href="https://www.smartkarma.com/entities/24865" target="_blank" data-smartkarma-citation="entities:24865:1">ING Groep NV (ING VX)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">, and </a><a href="https://www.smartkarma.com/entities/436" target="_blank" data-smartkarma-citation="entities:436:1">Ctbc Financial Holding (2891 TT)</a><a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">.</a> In fact, we believe that quintile 1 is ripe for extensive research given risk-reward profiles.<a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1"></a>
</li>
<li>For frontier types, selective Sri Lankan and Nigerian banks stand out.</li>
<li>In quintile 5, there are a sprinkling of Indian, Indonesian, Thai, and LATAM banks (including Brazil but not Argentina interestingly). Mexico's huge rally means that it may no longer offer such upside.</li>
</ul>

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares.

VFM is simply Value, Fundamentals, and Momentum.


For value, we utilise a franchise valuation based on the market pricing of the funding base.
For fundamentals, we incorporate our PH Score - a value-quality score based on financial metric change/momentum.
For Momentum, we prioritise a negative RSI.
The last filter relates to a default probability score where each bank is assigned a risk ranking.

We simply rank each of the four screens to arrive at an overall ranking. We are on the hunt for cheap assets which are neglected by the market - sometimes for a very good reason, sometimes unfairly so. 

So what are the conclusions of our VFM screen?


There are opportunities and traps (HSBC and DBS?) from all jurisdictions in quintile1.
European lenders with greater EM exposure feature.
UK and Austrian banks stand out. The latter again marked by EM exposure.
Japan and European banks in general have low valuations.
US banks carry a lower level of risk.
Some MENA (Saudi Arabia and Jordan for example) and Greater China banks are included.
Moving up the risk ladder, South Korean, Russian, and Turkish banks stand out. With regards the latter, there is a real concern that the fundamental metrics will deteriorate before very long. In fact, some can argue that this is already happening. But there is a price for everything and assets can get beaten up excessively by the herd. Sanction-sodden Turkey and Russia are intriguing on a five year timeframe or from a trading perspective. 
There are number of banks featured in the quintile that we have written about such as Bank Of East Asia (23 HK), Sberbank Of Russia, Emirates NBD PJSC (EMIRATES UH), Hana Financial (086790 KS), Woori Bank (000030 KS), Banco Bilbao Vizcaya Argentari (BBVA SM), ING Groep NV (ING VX), and Ctbc Financial Holding (2891 TT). In fact, we believe that quintile 1 is ripe for extensive research given risk-reward profiles.

For frontier types, selective Sri Lankan and Nigerian banks stand out.
In quintile 5, there are a sprinkling of Indian, Indonesian, Thai, and LATAM banks (including Brazil but not Argentina interestingly). Mexico's huge rally means that it may no longer offer such upside.


Spain

Banco Bilbao Vizcaya Argentaria, S.A. attracts deposits and offers retail, wholesale, and investment banking services.  The Bank offers consumer and mortgage loans, private banking, asset management, insurance, mutual funds, and securities brokerage services.  It operates in Europe, Latin America, United States, China and Turkey.

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Banco Bilbao Vizcaya Argentari (BBVA SM)

European Banks at Q119: Big Banks, Greek Banks...a Quantamental Evaluation

We take a look at a sample of European banks at Q119, and score them by financial strength (FUN), by trends and value-quality (PH Score) and by...

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Global Equity Strategy: EU and UK Financial Stocks Are Attractive

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward. ...

Vermilion Research

Mexican Banks AMLO Effect; Less Bad than Feared?

We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance...

Boost Research

European Banks: Little Delight From Turkey

Turkish exposures are manageable, but pressure on profits is likely.Turkey's rapid economic growth was fuelled by a surge in credit, with Turkish...

Morningstar, Inc.

Global Banks: Why VFM Matters

We use risk-adjusted VFM rankings to pinpoint opportunity across the global bank landscape. Our universe here is 620 listed bank shares. VFM is...

Paul Hollingworth

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