After five years of global financial crisis, it is easy to forget that not so long ago, the Banks sector used to be the biggest dividend payers in the European market.
Some European banks have structurally impaired business models, but some of them are quickly reaching the point at which significant cash distribution could become possible once more. In this report, we identify which banks are in each category.
The key metric going forward is the ‘distributability date' - the day on which we project each bank to reach its regulatory capital target and therefore to regain control of its free cash flow. We find that the banks where you have to wait the least time for free cash flow are being generally undervalued by the market.
Eoin Treacy's view The European banking sector engaged in what can only be described in profligate lending in the decade following the commitment to form the Euro. As interest rates converged, the availability of credit ballooned and fuelled a mania in housing speculation and welfare demands along the Eurozone's periphery.
As governments and the ECB continue to grapple with the problems that have resulted from the crash, no bank has been allowed to go bust. Plenty have been nationalised but there has been no wholesale right down of debts. The ECB's continued action to support both the banking sector and various sovereigns is aimed at giving countries the best chance possible to resolve their fiscal conditions.
The Euro Stoxx Banks Index / Euro Stoxx Index ratio has been trending lower since 2006 but rallied over the last few weeks to break the progression of lower rally highs. While this action is encouraging, it will need to find support at a progressively higher level on the next reaction to confirm a return to relative outperformance beyond the short term.
In absolute terms, the Index failed to sustain the downward break in July and has rallied back to test the region of the 200-day MA. A sustained move below 77 would now be required to question potential for some additional higher to lateral ranging.
I clicked through the constituents of the Banks Index this morning in an attempt to identify those with possible base formation characteristics.
In Italy, UniCredito Italiano (Weekly, Log), Unione di Banche Italiane (Weekly, Log) and Intesa SaoPaolo (Weekly, Log) all lost downward momentum over the last year and have also returned to test the upper boundary of their respective ranges.
Mediobanca (Weekly, Log) has rallied to break the 18-month progression of lower rally highs. Potential for additional higher to lateral ranging can be given the benefit of the doubt provided it finds support at a progressively higher level on the next reaction.
In Spain both Banco Santander (Weekly, Log) and BBVA (Weekly, Log) have rallied back above their respective 200-day MAs and sustained moves below their trend means would be required to question current scope for some additional upside.
In Portugal Banco BPI (Weekly, Log) lost downward momentum from late last year and is currently testing the upper side of its base. A sustained move above the 200-day MA would suggest a return to demand dominance beyond the short term.
In France BNP Paribas (Weekly, Log) and Societe Generale (Weekly, Log) lost downward momentum late last year and have rallied back to test the upper side of their respective bases.
In Germany, Deutsche Postbank is notable. The share found support in the region of the underlying trading range and the 200-day MA from July and rallied to post a new closing recovery high on Monday. While somewhat overbought in the very short-term, a sustained move below the MA would be required to question medium-term scope for continued upside.
In Switzerland, UBS (Weekly, Log) also exhibits a loss of downward momentum and ranging over the last year.
In the UK, Lloyds TSB (Weekly, Log) has held an upward bias since October and is now testing the upper side of the yearlong range. A sustained move back below the 200-day MA would be required to question continued potential for additional higher to lateral ranging.
While not a bank, the London Stock Exchange is worthy of mention. The share has been ranging in a tight manner, mostly above the 200-day MA since May and a sustained move below it would be required to question potential for a successful upward break.