Being a strategic investors implies that capital will be added to certain investments to help juice overall portfolio returns. It also doesn’t matter to strategic investors where that money goes. With the S&P 500 up 27% YTD and with every major money-center bank stock up even more than the S&P, investors should be thinking about where that desired “alpha” (outperformance) can come from in 2025. Selecting the big stocks and sectors that have underperformed is not uncommon, but strategic investors are generally willing to go wherever they think the easy-money is — and what if that easy-money happens to be in major European banking stocks rather than U.S. bank stocks.
Oggonomics is looking to see if the European banking stocks look more attractive than the U.S. banks. Most U.S. banks no longer trade at a discount to book value and their earnings valuations are above their norm. European banks have much lower multiples and their ADSs generally have not performed as well in 2024.
The U.S. is expected to be a favorable economy in 2025, and that should be good for financial stocks. Interest rates are not likely to fall as much as had been expected a few months earlier. The European economy is not as strong, and the European Central Bank just cut interest rates another 0.25%. That cut was to help shield concerns over debt in France and perhaps to get ahead of trade tariffs that have been threatened by the incoming Trump administration. The ECB’s key interest rate went to 3.0% from 3.25%, after the Swiss National Bank went with a surprisingly larger cut to 0.5%.
The U.S. Federal Reserve has its Fed Funds rate at a 4.50% to 4.75% range, and while that is expected to come down another 0.25% in the coming week it is still considerably higher than the rates charged by the ECB and Swiss National Bank. The CME FedWatch Tool is also no longer calling for Fed Funds to get as low as the current benchmark rate in Europe.
Where the real logic behind European banks is targeted for strategic investors is the implied discounts and relative bank performance in 2024. And then there is also the discount to forward earnings relative to U.S. banks.
COMPARING THE GAPS
The valuation gap and stock gains in 2024 (YTD) is considerable when looking at U.S. banks versus their European rivals. The European banks are also generally cheaper than U.S. banks on forward earnings valuations.
Bank of America Corp. (NYSE: BAC) trades at 1.31-times book value at 12.5-times forward earnings and its stock is up 37% YTD.
J.P. Morgan Chase & Co. (NYSE: JPM) trades at 2.1-times book value valued at 14.2-times forward earnings. Its stock is up 42% YTD.
Wells Fargo & Co. (NYSE: WFC) trades at 1.44-times book value and at 12.6-times forward earnings and its stock is up 44% YTD.
Citigroup, Inc. (NYSE: C) remains the one exception to excessive valuations above book value. Citi trades at 0.7-times book value and its stock is still up 39% YTD.
Now look at some of the key European banking stocks. All measures prepared are using their ADSs that trade on the NYSE in an effort to keep this in the same dollar-terms as US banks. Most of these banks also have operations in the United States as well.
Banco Bilbao Vizcaya Argentaria S.A. (NYSE: BBVA) trades at 0.98-times book value and at 6.2-times forward earnings and its stock is up 10% YTD.
Banco Santander S.A. (NYSE: SAN) trades at 0.7-times book value and 5.7-times forward earnings. Santander’s stock is up 17% YTD.
Barclays plc (NYSE: BCS) trades at 0.62-times book value and valued at 6.6-times forward earnings, but its ADSs are up a stronger-than-average 72% YTD.
Deutsche Bank AG (NYSE: DB) trades at 0.6-times book value and at 6-times forward earnings. Its stock is up 30% YTD.
HSBC Holdings plc (NYSE: HSBC) trades at 0.92-times book value and at 7.6-times forward earnings and its stock is up 22% YTD.
ING Groep N.V. (NYSE: ING) trades at 0.84-times book value and at 7-times forward earnings. Its stock is up just 2% YTD.
UBS Group AG (NYSE: UBS) is the more defensible ADS with perhaps the best balance sheet as it trades at 1.17-times book value and at 14-times earnings, but its stock is up just 5% YTD.
GOLDMAN SACHS ALSO SEES SELECTIVE BANK UPSIDE
Goldman Sachs has issued a call to go into European Banks as well, but on more of a selective basis because it does not have “Buy” ratings on all European banks universally. The firm believes that European banks will have challenges in 2025 based on the macro picture — weaker to sluggish EU growth, lower interest rates, and policy uncertainties. These issues are likely to keep European bank earnings lower despite their desire to keep returning capital to shareholders.
On top of valuation discounts, Goldman Sachs does like that Euro-area banks have diversified revenues in Europe and with its partners. It also cited better operating efficiency and capital discipline. Of the banks mentioned above, Goldman Sachs has Buy ratings Barclays, Deutsche Bank, HSBC, Santander and UBS. It also has Buy ratings on European banks like Bank of Ireland, BNP Paribas, DNB, Erste, Intesa Sanpaolo, NatWest, and Nordea. Goldman Sachs has “Sell” ratings on ABN AMRO, Credit Agricole, CaixaBank, and Handelsbanken.
DISCLAIMER & WARNING
Chasing banks or other sectors based on relative valuations and based on underperformance is no assurance that the valuations will reverse or that the gap will close. European banks face different regulations in Europe, and they face much of the same scrutiny in North America if their footprint is large enough.
No price targets and no investment ratings were provided other than the corroborating summary offered by Goldman Sachs. Oggonomics does not maintain formal rating and formal price targets on any of the banks mentioned in this reporting. This is not meant to be investment advice nor is it to be interpreted as a recommendation to buy or sell any of the securities mentioned. Valuations were taken from Finviz for this report and Oggonomics has not used other sources for cross-referencing those valuations.
