Tag: investing

European bankers should be ashamed (Finrestra podcast episode 8 transcript)

Listen to this episode on Spotify, Apple or YouTube!

Transcript:

“Hello and welcome to another episode of The Finrestra Podcast. My name is Jan Musschoot.

This is our first episode of December, so here is a quick recap of the European financial news of November 2021.

  • Euro area inflation remains far above the ECB’s 2 percent target. Dutch inflation was 5.2 percent, a figure not observed since 1982. The German inflation rate was the highest since 19 ninety 2. Ironically, the union of the ECB’s own employees wants higher wages due to inflation.
  • In other record news, the French stock market index CAC 40 reached a new all-time high. It finally surpassed its peak from the year 2000.

There was also consolidation news:

  • BBVA wants to buy the stake of Turkish Garanti BBVA bank it doesn’t own yet
  • KBC buys the Bulgarian banking activities of Raiffeisen Bank International

The news of record high stock prices brings us to the topic of this episode: European bank CEOs should be ashamed.

Why?

Because their stocks have been horrible investments. Despite a nice rally in 2021, most large European banks still trade 70, 80 or 90 percent below their 2007 highs.

Or look at banks by market capitalization. The biggest European bank, HSBC, is only worth a quarter of American JP Morgan. And you could argue that HSBC isn’t even really a European bank, as most of its profit is generated in Hong Kong.

What’s the second largest European bank by market cap? Surely it must be a German, British or French one? Nope. It’s actually Sberbank of Russia. Russia, a country with a GDP smaller than Italy’s.

I can hear some CEOs already. How they are victims of low interest rates, low growth, overcapacity. Blah blah blah.

Instead of making excuses, take a hard look at banks like DNB, KBC, Nordea and SEB. Why are these relatively small banks worth more than giants like Deutsche Bank, Société Générale and UniCredit?

I know the answer. But do bank CEOs?

Here’s some free advice. Listen to episode 3 of the Finrestra podcast. And watch the “Bank in two minutes” series on our YouTube channel.

What will you learn? That successful banks focus. Focus on a few countries. Focus on one client segment, or at least on very complementary segments.

In contrast, banks with low profitability are often monsters of Frankenstein. They are part retail bank, part investment bank. They are active in dozens of countries.

They are big, but do they deliver what clients and investors want? The market doesn’t think so.

Now dear listener, before I go, I want to ask you a favor. For an upcoming episode, I would like to talk about Industry, the series about junior investment bankers. I recognized a lot of situations in the series. So if you work in a bank, watched Industry and would like to talk about it, please contact me! This has been another episode of The Finrestra Podcast. If you have suggestions for topics or guests, you can mail me at jan.musschoot@finrestra.com. You can find me on twitter @janmusschoot. Thanks for listening!”

Why American stocks outperform

During the past decade, American stocks have far outperformed shares in the rest of the world.

Much of this gap is due to Big Tech (Apple, Amazon, Microsoft, Google, Facebook). Without these five stocks, the chart of the S&P 500 looks more like the world index.

But even if we exclude Big Tech, America still outperforms Europe. It’s easy to see why. Take a look at the Euro Stoxx 50. That Eurozone index is dominated by financial and industrial companies and utilities. They have few opportunities for growth, low profit margins, and they face structural changes (negative interest rates, electric vehicles, renewable energy).

The U.S. on the other hand has plenty of innovative companies with huge total addressable markets (TAMs). They are often software-as-a-service (SaaS) firms, e.g. Adobe, Netflix, Salesforce, Square or Zoom. Others reinvent existing services, e.g. Carvana, Peloton, Teladoc, Uber, Wayfair or Zillow. Or they have world class products with a strong brand name, e.g. Nvidia or Tesla.

You can find such companies in other parts of the world, but they are rare. Examples include Adyen and ASML (Netherlands), Delivery Hero (Germany), LVMH (France), Shopify (Canada) and TSMC (Taiwan).

Green finance

Asset managers, bankers, central bankers1… Everybody in finance is talking about climate change and sustainability.

Source

But what do green investments mean in practice?

A report by Common Wealth found that some climate-themed funds invest in oil & gas companies such as ExxonMobil. More broadly, the largest holdings of climate funds were Big Tech and finance. Adrienne Buller, the author of the study, writes “what do these ostensibly climate-focused funds really contribute to combatting the climate crisis, reducing emissions or driving a rapid transition to low carbon economic activities? There is nothing in the specific labelling or remit of these funds that would require them to invest in the green economy, in financial instruments design to drive the transition of business models to lower carbon activities, or other similar investments.” (emphasis mine)

Source: Common Wealth

There are plenty of metrics by which providers assess climate risk. Given different methodologies and the complexity of estimating climate risk, there is some divergence in the metrics. However, Chiara Colesanti Senni and Julia Anna Bingler do find that “metrics tend to converge for companies that are most and least exposed to climate risk”.

Data and tools for monitoring climate change and financial assets:

Organizations promoting green finance:

Organizations advocating broader economic change, including green finance:

2020 KBC shareholder meeting

I live-tweeted the 2020 shareholder meeting of KBC. You can read it on Twitter, in the Threadreader app or below:

Net interest margin in 2019: 1,95%

CEO Johan Thijs: 9% increase non-life insurance fees (KBC is bank-insurance company)

FYI: you can follow meeting here:
livestream.com/kbcstreamingse…

KBC had €216 billion assets under management in 2019 (I wonder how much will remain in 2020…)

KBC pays €491 million euro in bank taxes!

Continue reading “2020 KBC shareholder meeting”

Shorting is hard

Great Twitter thread (unrolled version here):

Technology, growth and value

“In Europe, the relative underperformance of value [stocks] versus growth has not been as sustained since the early 1980’s. In the US, according to research by O’Shaughnessy Asset Management, investors have to go back to 1926-1941 to find a comparable period of sustained relative performance.”

That’s from Inflection Point, a blog post in which Marc Rubinstein takes a long term look at the valuation of stocks and the impact of technology on markets and the economy. The article has a lot of references.

Update: Chris Meredith of O’Shaughnessy Asset Management talked about his research on Odd Lots.

What’s behind the low valuation of European banks?

Great explanation by Johannes Borgen on Twitter:

In summary: banks are more robust than they used to be, but they have profitability issues.

To learn more about bank stocks, listen to the recent episode of Odd Lots with John Hempton.

See also this thread by Marc Rubinstein:

I also blogged about bank stocks in my 2017 post A lost decade (for bank investors).

ECB board members need personal finance training

The ECB has released the declarations of interest of its executive and supervisory board members.

You’ll see that the forms are pretty vague when it comes to point IV – Financial interests. Board members should name “Any financial interests holdings in companies/firms listed on a stock exchange”.

Some members have included equity funds and bonds under this item, although one could argue if that’s really required.

However, the declarations of interest do contain some remarkable info:

  • German board members Sabine Lautenschlager-Peiter and Joachim Wuermeling own co-operative shares in banks. The value of these holdings is trivial.
  • Ed Sibley owns some shares in Bank of Ireland. Mr. Sibley adds: “These are the remnants from a share ownership scheme from when I worked for Bank of Ireland (until 2008). They are worth less than €500, and I am in the process of getting rid of them.”
  • Peter Praet owns shares of the National Bank of Belgium, one of the few publicly traded central banks.
  • The spouse/partner of Vytautas Valvonis works at the Lithuanian branch of Dankse Bank.
  • Several board members (Benoît Cœuré, Tom Dechaene, Yves Mersch,
    Gaston Reinesch, Vitas Vasiliauskas, Claude Wampach) teach at universities (see item II – private activities). The earnings from these professorships are trivial.
  • Mr. Wampach owns Turkish lira denominated bonds issued by the European Investment Bank. Let’s hope he hedged the currency risk 😉
  • The financial interests of board members Margarita Delgado (Spain), Catherine Galea (Malta) and Andreas Ittner (Austria) contain only securities from their home countries.
  • Constantinos Herodotou (Cyprus), Madis Müller (Estonia) and Pierre Wunsch (Belgium) have the most diversified investment portfolios – Mr. Müller even owns a gold ETF. They should teach their colleagues about the importance of diversification!

Why KBC Group has a larger market cap than Deutsche Bank

See my tweets from a couple of weeks ago. I’ll have more to say on the blog (including the potential merger/acquisition of Commerzbank) if I find the time…