Europe is, as the kids say these days, a hot mess.
Their economy is running well behind the United States, and parts of Europe like Italy and Greece are still pretty much in financial crisis mode.
The specter of BREXIT looms over the continent, and no one knows exactly how that is going to play out over the next year.
Last Friday, ECB President Mario Draghi said that the European economy was so weak that they would have to delay any interest rate hikes and might even have to add stimulus to prevent Europe from slipping back into a recession.
This is not what Eurozone bankers wanted to hear.
The slow economic growth has weighed on the big European and British banks, and the shares trade at distressed levels similar to where the big U.S. banks traded a decade ago.
All of the big banks across Europe trade below book value, and many of them are selling for less than half their estimated net worth.
Bankers had hoped that economic conditions would begin to improve by now lifting their share prices higher.
Instead, banks in the Old World fell by 25% as a group in 2018, and it has not gotten any better so far in 2019.
Euro Banks Should Take Some Notes from American History
U.S. banks delivered outstanding returns to shareholders when the economy began to turn around back in 2011.
Citigroup shares have doubled from the lows, and Bank of America (BAC) has seen its stock prices soar by more than five-fold as the economic recovery gained traction.
JP Morgan (JPM) has tripled from the lows, and even beleaguered Wells Fargo (WFC) has almost doubled.
It may have been a weak recovery, but it was enough for big banks stocks to deliver huge returns to bold investors.
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Will it play out the same way in Europe?
While there is no way of knowing for sure, I suspect it will.
It is not going to happen overnight, and it will be a very bumpy ride as the headlines will continue to be ugly at least through most of the year.
Ian Lapey runs the Gabelli Global Financial Services Fund, and he thinks we will see a massive recovery in the Eurozone banks in the years ahead.
He points out that most of the banks in Europe have recapitalized and are not in any real danger of failing anytime soon.
In his most recent shareholder letter, he points out that “The biggest detractors to performance were the Fund’s investments in European banks. This stock weakness seems to have been driven by macro concerns about Italian government bond spreads, Brexit, and an overall economic slowdown in the region even though fundamentals for banks remain healthy. To me, these concerns seem overblown and more than reflected in the extremely depressed valuations of the stocks. On average the common stocks of the European banks in the Fund trade at 60% of tangible book value. All are profitable and have strong financial positions.”
I agree with him.
Eventually, Europe will get its act together and stabilize.
Europe is never going to be a high growth region as the structure of the government and demographics in most European nations don’t support that.
However, all they have to do is stop sucking, and the bank prices will go up by several multiples of the current stock price over a few years.
Just Look to This German Banking Dynamic Duo
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Let’s look at Deutsche Bank (DB), the largest German bank that has struggled over the past several years.
If it could go wrong, it has gone wrong for this bank.
Thanks to misbehavior during the financial crisis, the bank has paid more than 12 billion euros in fines over the past few years.
While the bad news has gotten all the headlines, what most people are not seeing is that loan losses have declined sharply during the same period.
This means that the bank should be profitable again this year and could achieve double-digit earnings growth for the next several years.
There is also a chance that Deutsche Bank will merge with Commerzbank (CRZBY), the second largest bank in Germany.
This would create a banking powerhouse that could compete in Europe and the U.S. and potentially accelerate the recovery of the sagging stock price.
The stock has fallen into single digits from about $50 in the past few years, and even partial restoration of the lost ground would be a considerable gain from today’s price.
It is the same all across the region.
The question you have to answer for the large European banks right now is the same one we are asking in 2011 in the United States.
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The question is not can they grow, but can they survive?
If the answer is yes, then the upside is enormous as the stock should trade back up to more than book value over the next several years causing the shares to double and even triple in value.
To the Max,