Alphavalue’s analysts have repeatedly defended the opinion that the banks should be machines which pay dividends, now that they have recovered. And they should satisfy, at some point, those shareholders who have helped them double their capital base since 2017.
The crisis of confidence in Italy and the default shorting in the banks provide an opportunity for this dividend stream to be 6% cheaper. The sector lost 5.8% during the last week with Unicredit, dropping 13% and Intesa SanPaolo 8%.
According to the firm’s experts, the essential valuation metric of the banks would include a yield (dividend yield) of 5.1%, (six banks offer more than 7%, including Aareal Bank (Add, price target 44,2 euros) with close to a 10% yield), and a price/book value 2018 which has reverted to very reasonable levels of 0.8x.
The following table shows a recent history of these two ratios. The last time they were so attractive was approximately a year ago.
Pessimistic investors will argue that the previous ratios don’t predict a scenario of slowdown/crisis in the euro zone. Right, but, unless one is visualising some kind of Armageddon, there are a lot of possibilities for the banks to enjoy adequate credit growth in 2018 in a recovering Europe. The uncertainties surrounding Italy may even bring sufficient volatility to underpin its CIB revenues.
In any event, the fear has returned. The potential upside of European shares is now an attractive +10% in AlphaValue’s valuations and +16% for the banks. Although we have insisted on the risks, the potential is starting to be high.
The best upsides are in BBVA and Banco Sabadell each with +40% on a 6-month horizon. Unicredit is next with +36% and Santander offers +34% potential upside. Of course the Spanish banks have their own worries in Latin America (or Catalan and British for Sabadell), as well as the recent no-confidence vote against the Government.
But we can’t expect the banks to diversify their geographic risks and for the mechanisms to always work well.
Anyone can buy an ETF in the sector. But Alphavalue suggest focusing on the 13 names in the following table to give an extra “spark” to the “call”: a potential upside of +31% and a yield of 5.4% to finance the time factor if the banks don’t recover fast enough.