Which European Banks Are Investment-Worthy?

by: David Hunkar

The "too big to fail" concept in the banking industry that has been embraced by U.S. is also held true in Europe. European governments as well tend to support large banks that are important for the financial system. When smaller banks run into trouble they are left to die or forced to be taken over by bigger rivals. So in one sense, when it comes to investing in European banks , it may be wiser to first pick the large systematically important banks.

One way to identify such large European banks is to review the components of each country's main stock indices. Following this logic, lets take a look at the banks from the 3 main European stock indices.

1.FTSE 100 Index (NASDAQ:UK)
Barclays (NYSE:BCS)
HSBC Holdings (HBC)
Standard Chartered (OTCPK:SCBFF)
Llyods Bank (NYSE:LYG)
Royal Bank of Scotland (NYSE:RBS)

2.CAC-40 Index (France)
Credit Agriole
Societe Generale (OTCPK:SCGLY)

3.DAX (Germany)
Deutsche Bank (NYSE:DB)
Commerzbank (OTCPK:CRZBY)

Among the banks listed above HSBC, BNP Paribas and Deutsche Bank weathered the credit crisis better than others.

  • With its strong presence in Asia and global reach, HSBC will perform better when the economy improves.
  • Simiarly BNP Paribas is in a better than position than its rival Societe Generale which was hit with a huge loss last year made by a rogue trader.
  • Risk management at Societe Generale slipped in the past few years which is unusual.
  • Deutsche Bank is the global german banking powerhouse with operations in many emerging countries.
  • Commerzbank, while not as famous as Deutsche Bank, is a large banking group with a rich tradition dating bank to 1800s.

It must also be noted that though European banks leveraged themselves much more than U.S. banks during the pre-credit crisis years, they have written off most of the losses and are better positioned now than U.S. banks. This is because they do not have to face huge losses due to collapse in the residential real estate sector as their U.S. peers. Other than U.K. and Spain, the housing market in most European countries remain stable and unemployment level is still at manageable levels.