A Proposed Portfolio of High-Quality European Banks
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
High-quality and great expected performance
Finding value in France
Societe Generale (NASDAQOTH: SCGLY.PK) is cheap relative to its current fundamentals and looks like an opportunity when you take into account the very probable recovery of the French economy. The bank, which largely surpassed earnings per share consensus expectations in the first quarter, is taking the right measures to improve profitability. The key issues that are being taken care of are cost control and solvency. On the cost control side, Societe Generale has put in place a plan to cut costs by 8.5% (off of the 2011 base) with a self-imposed deadline set in 2015. On the solvency side, the bank is delivering above expectations. The current Basel III core ratio of 8.7% shall go up to 9.5% by the end of this year.
The most attractive feature of Societe Generale is its price. The bank trades at 58% its tangible book value and 5.8 times its price-to-earnings ratio. I also expect the bank to rise its dividend steadily. For 2013 I expect a 4% cash yield and for 2014 I would expect a 6% cash yield. I think Societe Generale should be 25% of this European banking portfolio.
A world-wide leader trading below book value
Deutsche Bank (NYSE: DB), the banking leader of Europe's biggest and strongest economy (Germany), is strangely cheap. Of course, Mr. Market has a point when it values Deutsche Bank so lowly. There are risks from litigation, regulation and a still tough macro environment; the bank is a strong international player, however, and has a strengthened capital position. After the equity increase, the bank has a 9.5% Basel III ratio, which is ahead of most of its peers (such as Barclays or JP Morgan.)
The performance of this high-potential portfolio will be tied to Europe's economic performance, which I think should ameliorate going forward. While you wait for the market to re-rate these stocks, you can enjoy a high-cash dividend yield. The weighted cash yield of this portfolio comes at a reasonable 3.4%. That said, I would expect this yield to grow fast from 2014 onwards.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!