Yesterday we wrote a research note on European banks following the volatility in HSBC shares and the dramatic performance this year for the industry. The main question is whether the industry can get back to the early 2019 profitability level which was around 7.5% return on equity which is quite acceptable given the low growth and low interest rate environment in Europe. While the industry looks interesting from a risk-reward ratio, although the bet could take years to play out in full, there is also interesting divergences among the individual banks in Europe. In this research note, we will look at 32 banks and financial services companies in the Bloomberg Europe 500 Banks & Financial Services Index.

Banks are often valued on price-to-tangible-book or price-to-earnings. We prefer the former ratio but differences in this ratio reflects many different parameters of a financial institution. The most important financial metrics are the Tier 1 Capital ratio which reflects the leverage of the balance sheet and how much capital the bank has available to withstand losses. The efficiency ratio is the operating costs to income ratio where the lower the better. The net interest margin (NIM) reflects both the competitive landscape but also the profitability for banks on its earnings assets against its borrowing costs. Forward return on equity expresses analyst expectations for return on equity in the future and is thus forward-looking (in this analysis we used the 2-year blended forward estimate).

Source: Bloomberg and Saxo Group

We ranked each financial institution each of these financial metrics including its market cap in EUR and the price-to-tangible-book. Please refer to the ranking methodology in the bottom. The list above is an objective ranking on a selection of financial metrics relevant for financial institutions and should not be viewed as our recommendation but as an inspirational list to see how valuation divergences between the different banks relative to key operating metrics.

The opposite story of Spanish and French banks

What immediately stands out are the two Spanish banks BBVA and Banco Santander which have been hit hard on valuation due to the severe negative impact from Covid-19 due to lockdowns and travel restrictions depriving the country much needed tourism income. However, the ranking suggests a very low valuation given their operating metrics. The best overall bank on these operating metrics relative to valuation and the market capitalization is DNB which is the biggest bank in Norway. The key risk for DNB is obviously its exposure to the Norwegian economy which is dependent on strong energy markets which are currently suffering from low oil prices. Another interesting observation is Societe Generale that has been hit by a slump in profits from its equity business driven by blowups in its structured product division. Societe Generale has seen its market capitalization dip below €10bn and currently has the lowest price-to-tangible-book ratio in Europe. On valuation it is the cheapest bank in Europe and thus could attract a lot interest from bargain hunters but it comes with big risks and analysts remain very skeptical of future return on equity.

Ranking methodology is as follow: Market cap (higher is better), PTBV (lower is better), Tier 1 ratio (higher is better), Efficiency ratio (lower is better), NIM (higher is better) and Fwd ROE (higher is better)