European Bank’s Shares Shattered or Under-valued?

The last few days saw the European bank’s shares substantially going down. Deutsche’s Bank shares went down from around 25 EUR/share in December 2015 to 13,68 today (Feb 12th, 2016). Other German banks suffered also losses of 10-20% on their share prices, whilst French and Italian ones did not fare very well too. Most of the hit banks were from the invesmtent banking sector – but the traditional commercial ones have not been spared too. Unicredit, the biggest Italian bank, has seen a similar fate too (down from 6 EUR/share to 3).
This downfall share price trend is ggetting super-serious for the bank sector itself, badly hurt by multiple factors. Amid most concerns are the (relatively) capitalization rules, which requires the banks to maintain a higher capital-to-loans ratio – and most of these mammoths have failed on the stress tests. Of course, this is a measure of efficiency – and most of the investment banks are trying hard to keep as low a ratio as possible, since this means for them doing business with other’s (mostly central banks) money/funds. A nice business model indeed for the banks, who have become mostly asset managers, rather than loan-making machines.

In reality, probably the European banks are facing the broader fate of the European economy: years of slow growth, stagnation and negative interest rates have taken a toll on the value that the banks can add for the shareholders. And whilst banks have been growing, the continuous push from the shareholders has been forcing them to go deeper into uncharted waters and take more risks -for example with exotic products (the CoCos resemble substantially with the sub-primes). But maybe it is time that the shareholders accept the new markets reality and do not force the banks to grow as fast as previously. By doing so, they take on more risks on the balance sheets, and a better PnL might not be as bullet-proof as it will look.
All in all still, I do think the European banks share prices are undervalued. The over-reaction from the investors who are cutting the share prices to 50% or so is not justified – banks have not been loosing value in this range in just 3 months. And even if the exotic/opaque exposures bear risks, these should not be more than 5-10% of their balance sheets. Over short term, this investor reaction looks like a mild panic. Over long term, somebody else might take advantage of the under-valuation of their shares – irony could be that the US investment banks might seize the chance and snap up some cheap shares in the continent. Then the things will become even more opaque – and more interesting for the Institutional investors :).

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