Undervalued Global Bank Stocks

by Gene Kirsch, Senior Banking Analyst | May 22, 2012

While the last Weiss Ratings undervalued portfolio focused on domestic banks, this portfolio will focus on
global banks including those in the U.S. that meet the undervalued criteria we established. As of April,
the domestic portfolio was up over 17%. Were going to try to beat those returns by including both
international and domestic banks that do business globally in our undervalued bank stock portfolio.
The basis of this analysis of global banks will be Weiss new global bank ratings (GBR) set to be released
in early June. These include ratings for the largest 200 publicly traded banks worldwide.
As youll undoubtedly remember, domestic bank stocks were annihilated in 2011, especially the large
money-center banks like Bank of America (BAC) (down 58%), Citigroup (C) (down 44%) and Wells Fargo
(WFC) (down 41%). Global bank stocks have not fared much better with some of the largest banks in the
world suffering lossesDeutsche Bank (DBK.DE) based in Germany (down 24%, Euros); Mitsubishi UFJ
Financial Group (8306.JP) based in Japan (down 23%, Yen); HSBC Holdings, PLC (HSBA) based in the
United Kingdom (down 19%, British Pounds) and BNP Paribas SA (BNP.PA) (down 34%, Euros). So, if
youre looking for good investment deals in the global bank sector, this might be the time.
For reference, well look at one of the most useful European financial indexes, iShares MSCI Europe
Financials Index (EUFN), a weighted exchange-traded fund (ETF) designed to measure the combined
equity market performance of the developed countries of Europe. It also mirrors the performance of the
MSCI Europe Financial Index. The EUFN lost almost 27% of its value in 2011, although year to date it is
up 9.2%. Some of its largest holdings include the above-mentioned global banks, HSBC Holdings PLC,
Deutsche Bank and BNP Paribas SA. Also included were Barclays PLC (BARC) based in the United
Kingdom (down 33%, British Pounds) and Banco Santander SA (SAN.MC, Euros) based in Spain (down
20%).
Other useful global bank indexes for comparison include the Bloomberg World Bank Index (BWBANK), a
much broader banking capitalization-weighted index of the leading bank stocks in the world. The
BWBANK Index lost 13% of its value in 2011. And the MSCI World Bank Index (MXWO0BK), a free-float
weighted equity index that was developed with a base value of 100 as of December 31, 1998 (includes
developed markets only), lost 14% if its value in 2011.
After the carnage, there were good values to be found domestically and there are some to be found
globally as well. First, lets consider the macroeconomic climate. On a global basis, there are several
diverging economies based on key metrics of Gross Domestic Product (GDP), unemployment, inflation
and interest rates. The table below shows these metrics sorted by the top 10 largest economies in the
world1:
GDP Growth
Rate %2

Unemployment
Rate %3

Inflation
Rate3

Interest
Rate3

United States

2.10

8.1%

2.7%

0.25%

China

8.10

4.1%

3.6%

6.56%

India

6.10

9.4%

9.4%

8.00%

Japan

-0.60

4.5%

0.5%

0.00%

Germany

1.50

7.4%

2.0%

1.00%

Russia

4.80

6.5%

3.7%

8.00%

Brazil

1.40

6.2%

5.2%

9.00%

United Kingdom

0.00

8.3%

3.5%

0.50%

France

1.41

9.8%

2.3%

1.00%

Italy

-0.40

9.8%

3.3%

1.00%

Country

Footnotes:
1 Economic data obtained from website tradingeconomics.com
2 GDP growth rates are from Q4 2011 except the United States, China and the United Kingdom which are all

from Q1 2012.
3 Unemployment, inflation and interest rates are based on the latest figure report by that particular country.

Some of the more robust economies with higher GDP and lower unemployment rates, have higher
inflation, and the interest rates and monetary policy set by their central banks tend to temper or cool
down those economies. Weaker economies that have lower GDP and higher unemployment rates have
instituted policies to stimulate their economies with lower inflation and lower interest rates.
Clearly, some have been more successful at managing their economies than others. For example, the
United States, the largest world economy, has the fourth-highest GDP growth rate among the 10 largest
economies, surpassed only by China, India and Russia, with a mid-range unemployment rate that is the
fifth-lowest. Yet, the U.S. also has the third-lowest inflation rate and second-lowest interest rate among
the 10. Looking at 196 countries, the United States ranks 47th highest in GDP growth, has the 40th
lowest unemployment rate, 25th lowest inflation rate and fifth-lowest interest rate based on year-end
2011 data.
Challenges still remain in many of the worlds economies, but low global interest rates in the weaker
economies and strong GDP growth rates in some economies are helping to offset those risks in the short
term. Monetary policies that kept borrowing relatively cheap for consumers and businesses should
continue to provide a boost to the banking industry, increasing lending activity and improving profitability.
Weve identified 10 of the 200 largest publicly traded banks that represent good investment value based
on the following criteria:
Positive

earnings per share

stock price to tangible book value less than 90%
Current stock price at least 10% off its 52-week high
Target price based on next fiscal year earnings greater than current stock price
Weiss Financial Strength Rating of C- (Fair) or higher 1
Actively traded stock with average three-month trading volume of at least 500,000 shares in their
primary listed stock exchange.
Traded on a U.S. stock exchange: NYSE, OTC or NASDAQ
Minimum stock price of $1.00 per share in U.S. Dollars
Current

Institution Name
Bendigo & Adelaide Bank LTD
BNP Paribas SA
Citigroup Inc.
Credit Suisse Group
JPMorgan Chase
Mediobanca S.p.A.
Mitsubishi UFJ Financial Group, Inc.
Sumitomo Mitsui Financial Group
Turkiye Vakyflar Bankasy T.A.O.
UBS AG

U.S. Ticker2
BXRBF
BNPQY
C
CS
JPM
MDIBY
MTU
SMFG
TKYVY
UBS

City
Bendigo
Paris
New York
Zurich
New York
Milan
Tokyo
Tokyo
Istanbul
Zurich

Country3
AU
FR
US
CH
US
IT
JP
JP
TR
CH

Stock Price4 % offHigh Book Value5 Forecast EPS6 Price Target7

6.74
-35%
9.77
0.89
7.10
33.39
-58%
72.24
7.49
59.65
26.01
-39%
61.52
4.65
37.04
19.79
-54%
28.96
3.55
28.29
33.49
-28%
48.68
5.47
43.60
3.77
-66%
9.26
0.86
6.84
4.28
-20%
8.66
0.61
4.85
29.34
-16%
49.21
4.20
33.43
1.67
-30%
2.00
0.31
2.45
11.33
-42%
14.78
1.64
13.05

% Change
5.37%
78.64%
42.43%
42.95%
30.19%
81.48%
13.25%
13.92%
47.30%
15.16%

Footnotes:
1Ratings are based on Weiss Ratings Global Bank Ratings (GBR); Est. release date of June 2012; A=Excellent; B=Good; C=Fair; D=Weak;
E=Very Weak; Plus sign=top of grade range; Minus sign=bottom of grade range
2U.S. stock ticker symbol includes the banks traded on the NYSE, OTC or NASDAQ
3Country abbreviations: AU=Australia, FR=France, US=United States, CH=Switzerland, IT=Italy, JP=Japan, SE=Sweden, TR=Turkey
4Stock price is based on the closing price as of May 18, 2012, converted to U.S. dollars
5Book value is based on Price to Book Ratio divided by stock price; converted to U.S. dollars.
6Forecast EPS is the mean (average) earnings per share for next fiscal year (may vary by bank); converted to U.S. dollars
7Price target is based on the average Price to Earnings Ratio (P/E) for all global, publicly traded banks included in the Weiss Global Bank
Report (7.97x); converted to U.S. dollars.

Of the basket of 10 undervalued global bank stocks meeting the established criteria, the average
forecasted price gain is 39.2% based on next fiscal year earnings. For example, Credit Suisse Group (CS)
traded at $19.79 per share as of May 18, with a book value of $28.96 as of December 31, 2011. The
bank is currently trading at a 54% discount from its 52-week high of $43.15 reached on June 1, 2011.
Based on the average P/E of global banks reviewed by Weiss of 7.97 and a forecasted EPS for next year
of $3.55, the 12-month price target is $28.29, an increase of 43% over the current price. The
assumptions are fairly conservative in that the 7.97 P/E is lower than the historical average of 14 for all
publicly traded companies. Forecasted EPS is the average of all analysts reporting on that bank for the
next fiscal year which may vary depending on when the bank last reported.

This undervalued basket is fairly broad based geographically including six of nine regions, and seven of
the 43 countries included in Weiss analysis. Banks in the non-European Union (non euro zone), African
and South American regions seem to be priced at full value and are, therefore, not recommended for
investment at this time.
While, there may be other undervalued global banks rated by Weiss for financial strength, they fall short
of meeting all of the criteria we established. For example, Bank of America, a bank on our domestic
undervalued stock list did not make the cut as an undervalued global bank because its financial strength
rating was below Fair. The United States, Japan and Switzerland lead the undervalued basket with two
banks each listed on the report.
Similar to our domestic undervalued list, we will continue to track the global bank stock performance on a
monthly basis. We look forward to reporting increased value for these global bank stocks in the coming
months.
Investors can trade these global bank stocks in the U.S. under the noted symbol, however, keep in mind
that the stocks may be more thinly traded here than the minimum 500,000 shares criteria. The bank
stocks can also be traded on their primary exchange using their foreign stock symbol. You can order the
Weiss global ratings which will include the primary exchange and trading symbol.
To review bank performance, see Weiss Ratings complete lists of the strongest and weakest banks
atwww.weissratings.com/banklists.