Banks
Five OTC-Foreign Bank Stocks
On August 23rd, the British-banking giant HSBC Holdings (HBC) bid for Nedbank(OTC: NDBKY), South Africa’s fourth largest bank. HSBC is trying to buy the majority stake held in Nedbank by Anglo-South African insurer Old Mutual. The deal potentially valued at $6.8B would give HSBC a 70% stake in Nedbank and offer the bank a strong presence in Africa’s largest economy.
With talks of a double-dip recession in the US economy and many Western banks still suffering from effects of the financial crisis,investors looking to gain exposure to international banks may consider the following emerging market bank stocks that are traded on the OTC markets in the US. Please note that these stocks are sponsored ADRs and have very light daily trading volumes.
1.Istanbul, Turkey-based Akbank (OTC: AKBTY) is Turkey’s most valuable bank based on market capitalization with 877 branches and assets of over $69B at the end of 2009. The capital adequacy ratio stood at 21% at the end of last year and Euromoney magazine selected Akbank as the “Best Bank in Turkey”. The current dividend yield of the ADR is 1.49% and the stock is up over 10% YTD.
2. Commercial International Bank (OTC: CIBEY) is the largest private sector bank in Egpyt based on loans. Last year the bank was ranked the best bank in Egypt by Euromoney, Global Finance and The Banker magazines. CIBEY is up over 29% YTD and the current yield is 2.02%.
3. Johannesburg, South Africa-based NedBank (OTC: NDBKY) is one of the largest banks in South Africa. The bank has the second largest deposit base from retail customers. The stock pays a dividend of 3.03% and the price has grown by about 13% YTD.
4.Turkiye Garanti Bankasi (OTC: TKGBY) is Turkey’s second largest private bank with an asset base of $78B at the end of 2009. Garanti has about 9 million customers and 792 branches. The current dividend yield on the ADR is 1.01% and the stock is trading under $5.
5. Czech-republic based Komercni Banka (OTC: KMBNY) is part of France’s Societe Generale(OTC: SCGLY) group. Komercni has operations in Central and Eastern Europe as well. Societe Generale holds 60.35% of the bank. Komercni has 1.62 million customers and 398 branches. As of second quarter this year, the capital adequacy ratio stood at 14.7% and Tier 1 capital ratio was 13.5%. The ADR pays a 4.38% dividend.
Review of Capital Levels of European Banks
On July 23rd European regulators will release the results of the stress tests which measures the ability of Europe’s bank to withstand future economic shocks. In the U.S., similar stress tests were conducted last year and for the most part the results were positive.
Some of the Eurozone banks with strong capital levels and exposure to markets outside of Europe include Spain’s Banco Santander (STD), Dutch banking giant ING Group (ING) and France’s BNP Paribas (BNPQY).These banks have been hit hard like other banks as investors fled European bank stocks due to many uncertainties. If the EU stress test results are good, then European banks may rally as the results may provide a boost to the market.
The latest edition of IMF’s Global Financial Stability Report contains the Bank Capital as a percentage of Assets for most of the countries. Hence higher ratio is good. The chart below shows the bank capital to asset ratio for the major Euro zone countries:
Click to Enlarge
Data Source: IMF
Note: U.S. is included in the chart for comparison purposes; 2009 data for some countries is not available
US banks have higher capital than most European banks. This is because unlike Europe, banks in the U.S. raised their capital levels last year with the help of TARP funds, issuance of new equity and other ways.European companies have traditionally been reluctant to raise capital by issuing new equity.
KBW: Bank Takeover List
The investment firm KBW has published its “Takeover List” in the U.S. banking sector after a gap of about two and half years. An article in The Wall Street Journal noted some of the reasons for the expected M&A activity include:
- A lack of earnings power
- Tough regulation on capital and use of debt
- More clarity on commercial real estate assets and other troubled loans on banks’ books
The takeover list is split into three categories:
- The KBW Potential Buyers List
- The KBW Potential Sellers List
- The KBW Potential Buyers Who Could Become Sellers List
The potential buyers include regional banks such as BB&T Corp (BBT), City National Corp (CYN), First Horizon National (FHN) and PNC Financial Services (PNC). The four “Too big to fail” super banks - Bank of America(BAC), JP Morgan Chase(JPM), Citibank(C) and Wells Fargo(WFC) are not in this list since they already at or near the regulatory limits on the share of U.S. deposits they are allowed to hold.
Of the 26 potential sellers, the following seven banks are attractive for buyers due to “a good footprint, more low-cost deposits and healthy fee-income businesses.”
- Abington Bancorp(ABBC) of PA
- Boston Private Financial Holdings(BPFH) of MA
- Cardinal Financial(CFNL) of VA
- Encore Bancshares(EBTX) of TX
- Susquehanna Bancshares(SUSQ) of PA
- Western Alliance Bancorporation(WAL) of NV
- Wilmington Trust(WL) of DE
These potential sellers have market caps of less than about $1B.
The top banks in the “Potential Buyers Who Could Become Sellers List” are:
- Bryn Mawr Bank (BMTC)
- Columbia Banking System (COLB)
- Citizens South Banking (CSBC)
- First Financial Holdings (FFCH)
- First Midwest Bancorp (FMBI)
- MB Financial (MBFI)
- PacWest Bancorp (PACW)
It must be noted that so far this year 86 banks have failed and the number of “problem banks” has reached 775 according to the FDIC. Some of the markets have way too many than needed. Hence there is plenty of room for consolidation in the highly fragmented U.S. banking industry.
Year-to-Date Performance of Foreign Bank Stocks
The chart below shows the year-to-date performance of US-listed foreign bank stocks:
Click to Enlarge
Notes:
1. Canadian banks are excluded in the chart
2. Data shown is as of June 11, 2010
Royal Bank of Scotland(RBS) is the best performing ADR with a return of about 33%. However it must be noted that RBS did a reverse stock split in the ratio of 20:1 in late 2008. The ADR price after the split came to around $20. Despite the rally last year, the current price of the stock is $12.45. Chilean banks Banco de Chile(BCH) and CorpBanca(CIB) have dividend yields of 6.37% and 7.92% respectively.
The worst performing banks are from Greece, Spain and Ireland. Allied Irish Banks (AIB), Bank of Ireland (IRE) and National Bank of Greece (NBG) trade under $ 5 per share. Beaten down Spanish banks Banco Santander (STD) and Banco Bilbao Vizcaya Argentaria (BBVA) may be long-term picks at current levels. Last month, the Spanish government approved a 15 billion euro package of austerity measures which includes lowering civil servants pay, freezing pensions, etc.
Yesterday The Wall Street Journal reported: “The long-awaited consolidation of dozens of Spain’s troubled regional banks picked up speed as two of the larger players said they were in talks on a deal with several other banks that would form the nation’s third-biggest financial institution.
Caja Madrid said Thursday it was negotiating with Bancaja, based in Valencia, plus five other savings banks as talks among Spain’s 45 cajas gained momentum. So far, 35 of these banks, which have been hit hard by the real-estate downturn, have said they are in merger talks.”
Consolidation in the Spanish banking industry bodes well for the future.In addition, banking giants Banco Santander and BBVA have large exposure to Latin American markets.
Some U.S. Banks Are In Better Shape Than Their European Peers
The European Central Bank warned yesterday that euro-zone banks faced an additional $239 billion in write-downs this year and next due to the economic outlook that is “clouded by uncertainty.”
From the Journal’s article titled ECB Warns Write-Downs Could Reach $239 Billion:
“The U.S. and U.K. moved aggressively in 2008 and 2009 to replenish their banks’ capital buffers, sometimes with taxpayer funds.
Most of Europe didn’t follow suit, because their banking systems were largely spared the carnage of their Anglo-American counterparts. But as a result, most European banks today have thinner capital cushions and heavier debt loads than their U.S. and U.K. rivals, leaving them vulnerable to an economic slowdown.
“Some European banks have less capital and more leverage than their U.S. counterparts and…the crisis in Europe seems to have lagged behind that in the U.S. in both the writing off of losses and in the speed of raising more capital,” said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, in a speech in May.
OECD figures show that a selection of major U.S. banks are operating with leverage ratios—the ratio of assets to common equity—of between 12 and 17. By comparison, the same ratio for a group of major European banks ranged from 21 to 49, according to the OECD.”
It is interesting to note that the Spanish banking giant Banco Santander (STD) has a lower leverage ratio than France’s BNP Paribas(OTC: BNPQY) and Societe Generale(OTC: SCGLY), Germany’s Deutsche Bank (DB) and Switzerland’s UBS AG (UBS). Banco Santander was recommended recently by David G.Herroof Harris Associates, named international fund manager of the decade by Morningstar. STD closed at $.983 today putting it very close to the 52-week low of $9.17.
Banking Industry Consolidation in Puerto Rico
The FDIC shutdown three banks in Puerto Rico(PR) yesterday which were on the verge of failure. The closed banks cost over $5B to the FDIC’s Deposit Insurance Fund (DIF). The three closed banks are:
1. W Holding Co. Inc.’s Westernbank (WHI)
2. R&G Financial Corp.’s R-G Premier Bank(OTC: RGFC)
3. EuroBancshares Inc.’s EuroBank
Source: WSJ
Oriental Bank and Trust of PR assumed all of the deposits of Eurobank. Scotiabank de Puerto Rico, a subsidiary of Bank of Novo Scotia(BNS), one of Canada’s largest banks assumed all of the deposits of R-G Premier Bank. PR bank Banco Popular de Puerto Rico(BPOP) took over the deposits of Westernbank Puerto Rico. Hence the market share of deposits of the three acquirers would rise from the fugures shown in the graph above.
From a Journal article:
“Not since the savings-and-loan crisis has the FDIC faced such a steep challenge in a local banking market. In one day in 1991, the FDIC shuttered seven New Hampshire banks that held 25% of bank assets in the state.
Washington Mutual Bank, the largest bank failure in America, held 11% of deposits in its home state of Washington before it collapsed in 2008, the largest bank failure in U.S. history.
The three Puerto Rican banks put up for sale by U.S. regulators have one-fourth of the island’s bank assets and more than one-fourth of its deposits.”
Puerto Rico’s economy has been struggling for many years now when the manufacturing industry left due to the phasing out of tax incentives. The current unemployment rate is over 15% and the household income is worse than that of Mississippi, the poorest state in the union. The government deficit soared 30% of annual budget in 2009. So many structural changes have to be made before the economy can recover in the island nation. However sale of the above three banks puts the banking industry, the lifeblood of the country’s eocnomy, in a better positon.
