Banking on a Rebound
For a long time, big global bank stocks used to be at the core of conservative portfolios – but not anymore.
Two such banking giants – with great brands – are now facing market turbulence and it’s time to take note.
Crunch Time at Credit Suisse
About a year ago, Credit Suisse brought in a new CEO, Tidjane Thiam, to launch and manage a turnaround in the bank’s fortunes.
Based in Zurich, with large operations in New York and London, Credit Suisse was, at the time, in the midst of a revenue and profit downturn with shareholders demanding a restructuring and less dependence on do-or-die investment-banking deal-making.
Part of the plan that was announced last October included – reducing high-cost back-office operations in London, expanding private-banking and wealth-management services around the world – but especially in Asia and emerging markets, strengthening the balance sheet by raising some capital and selling off some assets, and making some smart acquisitions in areas where it wants to grow.
Now, having worked in big international banks, I know how difficult it is to turn these battleships around. It takes some time, persistence, and talent to put these banks on a new trajectory.
Apparently, however, markets aren’t very patient.
Over the last year, Credit Suisse Group AG (CS) has plummeted 61%, and is down 49.8% so far in 2016. It now trades at just 45% of book (break-up) value.
So what’s the problem?
The bank incurred some sizable trading losses in March, and some suspect that its 6.6% current dividend is at risk, even short sellers are circling, and the bank is facing some difficulty in selling off some of its higher risk assets.
Still, Credit Suisse insists that it is on track to achieve more balance between investment banking and private banking, which produces more of a steady flow of fee-based income and requires less capital.
Interestingly, CS is not the only high-profile international bank facing some headwinds.
Decades Down at Deutsche Bank
Deutsche Bank (DB) shares now trade at their lowest level in three decades. Right before the global financial crisis, shares were trading at over $146 per share and they are now at $13.91.
DB is, in fact, facing some of the same challenges faced by Credit Suisse by restoring profitability by selling off some underperforming assets and cutting costs.
The bank is also dealing with the negative interest rate environment, Brexit fall out and an avalanche of negative articles on stress tests for its U.S. banking operations.
The result is that its shares have lost 54% of their value over the last year, and 42.4% so far in 2016. Deutsche Bank shares now trade at an incredible 26% of its book (break up) value.
Sidle Up to Oversold Shares
To me, these shares seem dramatically oversold.
First, to put things in perspective, Deutsche Bank, which is one of Europe’s largest banks, now has a market value of $17 billion, compared to about $200 billion for JPMorgan Chase & Co. (JPM).
Further, Deutsche Bank has a cash position of over $1 trillion, or $775 per share, versus its share price of $10.87. And, the bank actually made money in the last quarter.
Additionally, because DB is based on the continent, it has an advantage in the wake of Brexit, as it seems logical to expect that London-based banks will lose some market share going forward.
Finally, it should be pointed out that Deutsche Bank’s U.S. operations account for only 3% of the bank’s total assets.
Now I’m not recommending that you go out and load up on DB shares, but for long-term value investors, this could be a great time to initiate a position and move ahead on an incremental basis.
And, if you really want to hedge your bets, you might want to put Credit Suisse in your other saddlebag, even as you lean in the direction of the Deutsche Bank based on its deep value price.