The Strongest and Weakest European Banks based on the Core Tier 1 Ratio

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The global financial crisis and the ongoing European fiscal crisis have exposed the differences in strength of major banks in Europe. As the banking landscape has significantly changed in recent years, investors are trying to separate the wheat from the chaff. Accordingly strong and well-run banks will be preferred by investors while the weaker banks will continue to struggle for some more years.

An article in the FT Alphaville yesterday noted that  “Greater differentiation in European banks stocks is likely” quoting a research report by Morgan Stanley.From the report:

…our key focus is on just a handful of cheap banks with strong earnings power in their core franchises and that have reasonable odds that they can accelerate restructuring, exit non-core assets effectively and, critically, start to pay meaningful dividends. Swedbank replaces Credit Agricole as one of our top picks. Most Preferred list: UBS, BNP, Barclays, Swedbank, Sberbank and Aberdeen.

The Tier 1 ratio is a measure a bank’s financial strength. Hence higher the Tier 1 ratio the stronger the bank.

The Core Tier 1 Ratio of large European banks under Basel III standards are shown in the chart below:

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Source: European banks: same, same, and eventually different, FT Alphaville

It is not surprising to see Nordic banks top the list. Swedbank (SWDBY), Svenska Handelsbanken AB (SVNLY), SEB, DNB ASA (DNHBY), Nordea Bank (NRBAY) are projected to have high capital levels next year and in 2014. Hence investors looking to add European bank stocks can initiate new positions in these banks and avoid the banks at the bottom part of the list. The Russian bank Sberbank Rossii OAO (SBRCY) has a $60.5 billion market capitalization and a 2.24% dividend yield.

Disclosure: Long SWDBY

15 Investment Opportunities in the Energy Equipment, Engineering & Construction Sector

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One way to profit from the global growth in energy industry is to invest in companies that provide the infrastructure, equipment, engineering and services to the industry.This strategy follows the theme whereby it is best to invest in firms that provide the tools and services to a specific industry as opposed to investing directly in the companies of the industry.Last week I wrote an article using the global auto industry as an example.

In the energy industry for instance, the oil producers contract out most of the activities such as the production of mechanical components for land and offshore drilling rigs, drilling services, servicing rigs, vessel fleet services, construction, installation and maintenance of pipelines, etc. These companies help the oil producers focus on their core operations while they take care of the rest of the work involved. In addition to the oil industry, these equipment, engineering & construction firms offer their services to other industries such as utilities, construction, transportation, etc.

The Top 15 Companies that serve the energy industry primarily in the oil and gas market are listed below:

2011 RankCompanyTickerCountry
1National Oilwell VarcoNOVUSA
2TenarisTSLuxembourg
3SaipemN/AItaly
4KeppelKPELFSingapore
5FMC TechnologiesFTIUSA
6CameronCAMUSA
7TechnipTKPPYFrance
8FluorFLRUSA
9PetrofacN/AUK
10Samsung EngineeringN/AKorea
11Subsea 7N/AUK
12WorleyParsonsN/AAustralia
13JGC CorpJGCCYJapan
14Sembcorp IndustriesN/ASingapore
15Jacobs EngineeringJECUSA

 

Source: PFC Energy

The following chart shows the performance of National Oilwell Varco, 2011’s top ranked firm and the four major integrated oil majors since 2006:

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Source: Yahoo Finance

While the growth of the oil majors was 50% or lower CAM rose by over 130% in the time period shown.

Other firms in this sectors that investors can consider include US-based McDermott International Inc. (MDR) and KBR Inc. (KBR), Swiss-based Foster Wheeler AG (FWLT) and Japan-based Chiyoda Corporation.

Disclosure: Long TKPPY

U.S. Tax Revenue as Percentage of GDP 2000 to 2011

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With the election over, the U.S. is now currently bogged in the over-hyped political issue called the “fiscal cliff“. We can expect the media to focus on this political drama as the lead story for the rest of the year.

An important measure to describe a country’s finances is the measure of tax receipts, the revenues that a government collects each year. While the U.S. has the largest economy in the world, the country has one of the lowest tax revenue to GDP ratio among the OECD countries.

Tax Revenue as a percentage of GDP 2000 to 2011:

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Note:

* indicates not available.

1. The total tax revenues have been reduced by the amount of any capital transfer that represents uncollected taxes.
2. Unified Germany beginning in 1991.
3. The data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
4. Secretariat estimate, including expected revenues collected by local governments.
5. Secretariat estimate, including expected revenues collected by state and local governments.

Source: OECD

Tax revenues as percentage of GDP rose from 33.8% in 2010 to 34.0% in 2011 for OECD countries. This is still below the recent peak of 35.0% reached in 2007.

During the period noted the U.S. figure was well below the OECD average. In 2010, the U.S. measure was 24.8% compared to the OECD average of 33.8%.

U.S. Tax Revenue main headings as percentage of GDP in select years

 

Source: OECD

The OECD made the following observations:

Revenue from personal and corporate income taxes was 14.9% of GDP in 2000 and 11.8% in 2011. The 2010 figure was 10.8%, just below the OECD average of 11.3%.
The tax ratio for Social security contributions was 6.9% of GDP in 2000 and 5.7% in 2011. The 2010 figure of 6.4% was well below the OECD average of 9.5%.
The tax ratio for Taxes on goods and services was 4.7% of GDP in 2000 and 4.6% in 2011. The 2010 figure of 4.5% was well below the OECD average of 11.0%.
Property tax revenues were 3.2% of GDP in 2010, more than 50% above the OECD average of 1.9%.

It is interesting to note that while the U.S. ranks below the OECD average in personal and corporate income taxes, social security contributions and taxes on goods and services, in property tax revenues the U.S. figure is 50% higher then OECD average. This is not surprising since most average Americans complain about out-of-control property taxes all the time. Property taxes are controlled by local politicians and they operate it as a piggy back to fund all kinds of useless projects such as funneling millions of dollars to powerful well-connected individuals to build stadiums for sports activities. According to one Bloomberg report on this ongoing scam across the country, U.S. tax payers are projected to lose $4 billion. Another reason for high property tax revenues in the U.S. is that unlike the Federal government, local governments cannot print money when needed to fund all the pork belly projects. Hence the easiest way is to simply raise property taxes which can bring in millions even with a tiny percentage increase.

Global Fertilizer and Industrial Gas Companies Are Increasing Capital Expenditures

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Fertilizer and industrial gas companies are increasing their capital investments as measured by the ratio of capital expenditures to revenue levels according to a study by the ICIS Chemical Business magazine. From the ICIS Top 100 Chemical Companies 2012 report:

For the second year running, the biggest spenders were dominated by fertilizer producers and industrial gas companies, as represented by an analysis of the ratio of capital expenditures to revenue levels. Fertilizer producers are undergoing a multi-year capital investment cycle to bring new fertilizer capacity on stream.

Industrial gas companies are seeing strong demand for their products from Asia and higher levels of capital expenditures are an integral part of their business model to supply their customers with their gaseous needs.

Click to enlarge

 

Source: ICIS Chemical Business

The world’s population is 7,053,055,457 as of Nov 18, 2012 and is projected to grow to over by 7.4 to 10.6 billion by the year 2050.

 

Source: World Population to 2300, United Nations

Higher population means higher demand for food which in turn drives the demand for fertilizer. Hence it is not surprising to see global fertilizer firms increase their capital investments to meet the world’s fertilizer needs.

Similar to fertilizers, industrial gases are also one of the main necessities of the modern world. From an article I wrote in 2010:

Industrial gases are a group of gases that are used in many industries such as metal, polymer, food, medical, oil refining industries. Like utilities and consumer staples, this sector can be considered as a stable and relatively safe industry to invest in during all market conditions.

Some of the industrial gases are Acetylene, Hydrogen, Oxygen, Nitrogen, Carbon dioxide and Argon. These gases can be transported in either compressed, liquid, or solid forms. Acetylene is used for cutting steel and for welding. Hydrogen is used in the edible fat and oil industries where it is used to hydrogenate vegetable oils to make margarine. Carbon dioxide is used to carbonate soft drinks, beers, etc. It is also used to remove caffeine from coffee beans to make decaffeinated coffee. Nitrogen is used for cooling many mechanical equipments that needs to be extremely cold in the food industry.In addition to the medical industry, Oxygen is used in the steel industry to remove impurities in the steel. Since Argon is highly un-reactive it is used to protect very hot metal such as molten metal.

Based  on the factors noted above, investments in fertilizer and  industrial gas stocks is a sound strategy. Companies shown from the ICIS chart above that trade on the US markets are listed below:

1.Company: Potash Corp (POT)
Current Dividend Yield: 2.25%
Country: Canada

2.Company: Praxair (PX)
Current Dividend Yield: 2.11%
Country: USA

3.Company: Air Liquide (AIQUY)
Current Dividend Yield: 2.51%
Country: France

4.Company: Solvay (SVYZY)
Current Dividend Yield: 3.32%
Country: France

5.Company: Linde AG (LNEGY)
Current Dividend Yield: 2.03%
Country:Germany

6.Company: AirGas (ARG)
Current Dividend Yield: 1.85%
Country: USA

7.Company: Arkema (ARKAY)
Current Dividend Yield: 1.76%
Country: France

8.Company: Asahi Glass Co. Ltd.(ASGLY)
Current Dividend Yield: 4.58%
Country: Japan

9.Company: Rockwood Holdings, Inc.(ROC)
Current Dividend Yield: 3.29%
Country:

11.Company:Asahi Kasei (AHKSY)
Current Dividend Yield: 3.17%
Country: Japan

Note: Dividend yields noted are as of Nov 18, 2012

Disclosure: No Positions