Buying Euro-Zone Banks

Includes: NBGGY, SAN
by: Alan Young

This week has seen yet another crisis of confidence in European banks, as increased risk has suddenly (and unreasonably) been attributed to Italy’s bonds. When prices are driven by “news” that is really just new spin on information that has already been known, there is a good opportunity to trade.

In this case, the spin has driven valuation of European banking stocks down to very attractive levels. Two banks in particular have attracted my attention.

I’ve written previously about the National Bank of Greece (NBG), arguing that so much negativity had been priced into the stock that there was much more potential upside than down. I still think this is true, probably even more so, since the market has continued to drive the stock price down. But there’s a new opportunity here as well. The bank suspended the dividend on its preferred shares, NBG-A, which had been scheduled for payment on June 1. Before the announcement, the shares were trading around $15, for a yield of 15%. But investors drawn to this yield fled when the dividends were cancelled, and the price is now less than half of that.

The cancellation of the dividends were not a big surprise, but I think the price is attractive again. Sooner or later, the dividend will be reinstated, so holders of the shares who buy at the current price will be earning a 30% return, plus whatever capital gain is realized when the shares are sold or called. The only question is how long one will have to wait.

The other bank I’ve nibbled on is Spain's Banco Santander (STD). This is thought to be the best-capitalized and best-diversified bank in the euro-zone, and it is still paying regular dividends. Yet in the current panic, common shares are trading at a 30% discount to the bank’s cash holdings, with a dividend yield of 8.5%.

STD also has several series of preferred shares, most yielding in the area of 8-9%. In other words, they are priced as junk, even though S&P rated them A- just 3 weeks ago.

There is always some risk. If the euro-zone completely disintegrates over its current debt disputes, Euro-denominated bank stocks will suffer catastrophically. But I don’t think it’s likely. In any other scenario, these seem like a rare bargain.

Disclosure: I am long NBG, STD. Also long NBG-A and STD-B.