European Banks Continue To Delever, Valuations Below Average

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Nordic banks lead on payout

Skandinaviska Enskilda Banken AB (STO:SEB-A) reported a steep dividend increase for fiscal year 2013, up 45% year over year to SKr 4/share. This results in a 60% payout ratio, which is 15% ahead of consensus expectations. Svenska Handelsbanken AB (STO:SHB-A) reported SKr 16.5/share dividends ahead of consensus estimates of SKr 11.5/share, which included a special dividend of SKr 5/share. SHB ended up with a 75% payout ratio. Lastly,  Deutsche Bank AG (NYSE:DB) (FRA:DBK) (ETR:DBK) declared its first dividend since 2007 of DKr 2/share beating consensus estimates of DKr 1.29/share.

Meanwhile, Citi analysts, led by Kinner Lakhani and Vikas Sharma, note that UBS AG (NYSE:UBS) communicated its intent to improve payout ratios once capital targets were met. UBS said that once its minimum fully loaded Basel III Common Equity Tier 1 ratio of 13% is reached, its payout ratio will increase to over 50%. As of yearend 2013, the Basel III common equity tier 1 ratio stood at 12.8%. Meanwhile, BNP Paribas SA (EPA:BNP) equivalent ratio stood at 10.3%. The French bank paid out EUR 1.50/share in dividends in 2013 resulting in a 40.8% payout ratio, stable relative to 2012.

Focus on Basel III common equity tier 1

The Basel III capital framework introduced in 2010 sought to improve transparency and consistency of capital reporting by being stricter in rules regarding which elements to include in capital measures and by introducing the common equity tier 1 ratio. Tier 1 capital is now divided into common equity and additional tier 1 capital.

Source: Price Waterhouse Coopers, LLC (PWC)

tier capital European Banks

Source: Price Waterhouse Coopers, LLC (PWC)

deductions from core equity tier1 European Banks

Source: Price Waterhouse Coopers, LLC (PWC)

Citi analysts note that their covered universe of European banks will likely meet Basel III common equity tier 1 ratios by the end of next year. The lowest estimated target is 10%, which is above the 9.5% required by Basel III on 1/1/2018. BNP Paribas SA (EPA:BNP), Commerzbank AG (OTCMKTS:CRZBY), ING Groep NV (NYSE:ING), KBC Bank (EN Brussels: KBC), Natixis SA (EPA:KN), and Societe Generale SA (EPA:GLE) are on the low end of the common equity tier 1 ratio range while Dun & Bradstreet Corp (NYSE:DNB) has the highest estimated target at 13.5%. Overall, if targets are met, European banks will have enough capital to weather environments of economic and financial stress or overheated credit markets.

European Banks

Source: Citi Research

capital ratios

Source: Price Waterhouse Coopers, LLC (PWC)

European Banks continue to deleverage

Kinner Lakhani and Vikas Sharma highlight the drop in issuance of senior unsecured debt by European banks. Issuance has dropped from highs reached in 2009 as banks continue to remove debt from their balance sheets.

European Banks

Source: Dealogic and Citi Research

Valuations below long-term averages

Both price/book and price/tangible book value are trading below 34 year averages for Citi’s European bank coverage universe. As the table below shows, 15 out of 21 banks in Citi’s universe have recovered their price/tangible book value ratios to pre-2009 trough levels. Credit Suisse may have appreciation potential for 2014, as pointed out by Trapeze Asset Management. Trapeze’s team notes that Credit Suisse Group AG (NYSE:CS) is refocusing its investments in private banking and wealth management. Cost cutting and growth initiatives could generate a return on equity of 14% by 2015. Also, Credit Suisse Group AG (NYSE:CS) is trading at a discount on a price/tangible book value and investors could be underestimating the value of the capital markets division.

european banks

current vs trough


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