Opinion Leaders
Value opportunities are emerging in Europe
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Ian Lance
Portfolio Manager, Value & Income
Redwheel
Europe faces a challenging macroeconomic backdrop. A complex geopolitical environment, risks of an energy crisis and the threat of being squeezed between the tensions of China and the US are all valid reasons to be cautious on the outlook for Europe today.
Why European banks stand out
ABN Amro, ING Group and BNP Paribas exemplify this value potential. After years of depressed earnings resulting from artificially supressed interest rates and tough regulatory requirements, the market seems to have given up on these businesses and this has been reflected in very low valuations. While higher rates in Europe and a steepening yield curve should be positive for the sector, we think that shareholders are likely to be rewarded even in the absence of this.
All of these banks are very well capitalised with capital ratios (CET1) significantly above their regulatory requirements and they are now led by management teams that are cautiously returning the excess capital to shareholders via dividends and disciplined share repurchases. The average P/E of these banks is 8.0x, the dividend yield is 6.5% and the P/B is 0.8x. These banks have, on average, the equivalent of 23% of their market capitalisation sitting on the balance sheet as capital surplus [1].
A better risk-reward trade-off
This means that if we invest €100 in these three banks, we are able to buy €118 of book value, have €23 back immediately as cash, generate €12.5 in earnings and receive a dividend of €6.5 in less than twelve months; not a bad value proposition, especially when compared to the S&P500 where the same €100 can only buy us €21 of book value and generate €4.9 in earnings while receiving €1.5 in dividends.
Despite trading at attractive multiples today, European banks have in fact outperformed the Magnificent Seven stocks over the past three years, the period that saw the latter establish their market dominance. This roundly contradicts the assumption that growth stocks are the only path to superior performance. It’s also further evidence that investors are beginning to reassess the role of value stocks in their portfolios.
MSCI European Baks vs Magnificent Seven
Source: Bloomberg, 11 March 2025. Net return (EUR) normalised to 100.
Time to reconsider value
We think that the best way to make money by investing over time is to acquire cash generating assets for less than their true worth and we like European banks because we think that there is a large margin of safety embedded in today’s valuation. Even if our expectations turn out to be too optimistic, we think that these banks will deliver returns that are meaningfully above what else is available on the market today. And whilst it is too early to call the turn for definite, there are encouraging signs that the market is starting to agree with us. Year to date, the share prices of ABN, BNP and ING have risen by more than 23% whilst the Magnificent Seven stocks have fallen by almost 20%.
