Enterprising Investor
7 years ago
New Deutsche Bank Investor Cerberus Doubles Down on German Lenders (11/15/17)
By Jenny Strasburg
U.S. private-equity firm Cerberus Capital Management LP on Wednesday disclosed a 3% stake in Deutsche Bank AG, deepening its bets on European banks and the German economy.
The investment, worth roughly EUR978 million ($1.2 billion) at Wednesday's closing share price, made Cerberus the bank's No. 4 shareholder. The roster is led by a Chinese conglomerate, members of the Qatari royal family and U.S. asset manager BlackRock Inc.
This summer, Cerberus disclosed a roughly 5% stake in Germany's No. 2 lender, Commerzbank AG. Cerberus manages more than $30 billion in assets.
The firm said Wednesday in a statement that Germany is a "highly attractive place to invest." It cited "attractive long-term opportunities in retail and corporate banking due to Germany's robust economy, high savings rate, and a number of other factors."
"We welcome every investor who believes in the value potential of the Deutsche Bank share," Deutsche Bank said in a statement.
Deutsche Bank shares rose on the news, climbing 1.9% for the day, to EUR15.76. The shares are up 2.4% this year, after a brutal 2016 hampered by questions about strategy, unsettled legal battles and the bank's capital position.
Earlier this year Deutsche Bank raised $8.5 billion in a share sale and refreshed its strategy, which now includes a multiyear process of combining its big German retail-banking operations.
There was no indication Wednesday that Cerberus has communicated with Deutsche Bank beyond formally notifying the bank of its share position, a person briefed on the communications said.
Still, Cerberus's recent arrival to Germany to amass a roughly $2 billion combined stake in its two biggest lenders will fuel speculation that the banks could talk about a potential merger -- if not now, then down the road -- analysts and investors said. Some said Cerberus can be patient, citing its 2006 purchase of Austrian retail bank Bawag PSK for about EUR3.2 billion.
Bawag raised EUR1.9 billion last month in Austria's biggest-ever initial public offering, which valued the company at EUR4.7 billion. Cerberus retains a significant stake.
Commerzbank, with advisers, has been evaluating its strategic options, people close to the bank say. After a 2008 bailout, Commerzbank remains around 15% government owned, and has long been the subject of merger speculation. Its executives have declined to comment on the speculation or on discussions with shareholders. A spokeswoman declined to comment Wednesday. The bank's shares rose 1.8% Wednesday, to EUR11.87.
Bankers say financial executives in general have warmed to the idea of potential big European bank mergers, both domestic and cross-border. Some bankers and finance executives say combining all or big portions of Deutsche Bank and Commerzbank would be too messy, unwieldy or politically unacceptable, though others say such a move can't be ruled out. Speculation about cross-border mergers, with German banks or otherwise, also has focused on French and Italian banks.
Executives of Commerzbank and Deutsche Bank held preliminary talks in August 2016 about a potential tie-up, but concluded it wasn't viable, The Wall Street Journal and others reported at the time, citing people familiar with the matter. Since then Deutsche Bank said it would integrate its big Postbank retail-banking business in Germany, after earlier planning to shed it.
Enterprising Investor
9 years ago
Forget about weak European bank earnings â Citi says itâs time to dive in (4/29/16)
By Sara Sjolin
A dramatic slump in first-quarter profits. A sharp underperformance in the stock markets. And an indisputable difficult business environment.
No, 2016 hasnât been great for the European banking sector, but itâs time to perk up on the unloved industry and load up on shares while they are still a bargain, analysts at Citigroup say.
In a note dated Thursday, the analysts argued that the losses over the recent year â the Stoxx Europe 600 banks index is down 29% over the past 12 months â make it a solid entry point into the sector.
âThe recent derating provides a good cushion for disappointment at a time when various macro drivers should provide a more positive support for the sector, i.e., rising oil prices/CPI, narrowing credit spreads, stabilizing GDP,â the analysts wrote in the note.
âWe see the case for moving more positive on European banks and move to overweight in our European sector strategy,â they added.
Of course, there have been many false dawns for the banks over the past few years. In 2009 and 2012-2013, sharp relief rallies occurred after periods of serious concerns about the global economy and the future of the eurozone. But those rebounds âappear insignificantâ when you look at the consistent underperformance over the last decade, Citi said.
Since 2003, the segment has been the worst performing sector in Europe, with half of all the regionâs banks underperforming the market by at least 50%. This has been because of a flagging European and global economy, building of capital buffers, deleveraging and dealing with a raft of new regulations postcrisis.
Then came the brave new world of negative interest rates, which has been criticized for squeezing net interest margins and eroding bank profits. The first-quarter earnings season is partly a testament to that, with major banks reporting significant declines in profit. At Deutsche Bank AG for example, net income sank 58% in the first three months of the year, while earnings at Spanish lender BBVA tumbled 54%.
âThe recent underperformance of European Banks has been sharp. The sectorâs derating has been aggressive. The sector is back toward its post-1980 lows on price/book,â Citi explained.
But the U.S. bank is more optimistic on the future for its European peers when looking into the rest of 2016 and to 2017 and 2018. Rising oil prices and receding fears of a global recession play a major part in this, and so do signs of rising core inflation in the U.S. and the U.K.
Additionally, they are more upbeat on the earnings outlook and see an almost 10% annual growth rate in profits for 2017-2018. Among banks that are set to bring about the biggest upside, but with the greatest protection against risks, Citi pointed to Lloyds Banking Group PLC, BNP Paribas SA, Danske Bank AS, KBC Group NV, Banco de Sabadell and Commerzbank AG.
There is a major caveat to Citiâs positive outlook on Europeâs banking sector, though: The June 23 Brexit referendum in the U.K. on whether the country should leave the EU.
âIn the near-term a vote for the U.K. to leave the EU in late June would likely be disruptive for banks across the region and especially in the U.K., although Citiâs base case remains for no Brexit,â the analysts said.
http://www.marketwatch.com/story/forget-about-weak-european-bank-earnings----citi-says-its-time-to-dive-in-2016-04-29
Enterprising Investor
9 years ago
European Retail and Real Estate Stocks Headed Higher (9/05/15)
Europe must still cope with China and deflation. But certain sectors still look like opportunities.
By Digby Larner
European investors received a much-needed shot in the arm last week when the European Central Bank hinted it could expand its quantitative-easing program to help combat pressure on inflation from weak commodities prices and Chinaâs economic woes.
The Stoxx Europe 600 index closed more than 2.3% higher on Thursday after ECB President Mario Draghi stressed the central bankâs âwillingness and ability to act if warranted.â
Stocks around the world have taken a battering lately, as oil prices resumed their downward path, and China, a key export market for the euro zone, continued to push out disappointing economic data. Following Thursdayâs gains, the Stoxx index had still tumbled by almost 12% from the previous month.
The problems afflicting markets have upset the ECBâs efforts to lift inflation, dampening the positive impact of its 60 billion euros ($67.44 billion) a month bond-buying program launched earlier this year. As a result, its initial signs of success turned out to be short-lived.
The euro dropped to about $1.05 when QE was launched in March, but more recently crept back to around $1.12 ahead of last weekâs ECB announcement.
At Thursdayâs meeting, the ECB reduced its inflation forecast for this year to 0.1% from its previous figure of 0.3%, which itself was modest relative to its medium-term target of just under 2%. In August, euro-zone inflation was only 0.2% on the year. The ECB also lowered its expectations for next year to 1.1% from 1.5%, and for 2017, to 1.7% from 1.8%.
Some adjustment had been widely expected following comments from the central bankâs Chief Economist Peter Praet a week earlier, who warned the risk of Europe suffering weak inflation in the longer term had increased.
Bank of America Merrill Lynchâs Europe economist Gilles Moec had expected minor tweaking to the ECBâs monetary policy, with the possibility of a more substantial move further out. âIn the medium run, we believe the negative risk to consumer prices from the China-related turmoil matters more than the adverse shock on growth,â he says.
Hopes that Chinaâs problems werenât as deep-rooted as some feared were shaken on Tuesday when the country published weaker-than-expected manufacturing data.
Apart from the likely positive impact on European stocks from more extensive monetary intervention, investors are buoyed by the prospect that ongoing economic weakness will continue to keep a lid on interest rates. Janus Capital reckons Chinaâs woes and low rates will be especially helpful for Europeâs retailers and property businesses. âChinaâs weakness to some extent is a boon to consumers, with lower oil and gasoline prices, lower prices on imported goods such as apparel, and lower raw-material prices overall. Retailers can do well if positioned to take advantage of healthier and savvier consumers,â says Janus European Equity Strategy fund portfolio manager Wahid Chammas.
LOW INTEREST RATES, in particular, should be good for European real estate businesses, he says. âThe property market is firming throughout Europe and looks especially attractive in Germany,â he says, as lower rates keep prices high and provide cheap financing for acquisitions.
He says Germany has one of the fastest growth rates in household formation, as people continue migrating from the countryside to cities and as the number of working immigrants increases. âThe German housing market is one of the lowest priced when considering their [gross domestic product] per capita, their average wage rate versus house prices, and their low interest rates,â he says.
Vonovia (ticker: VNA.Germany), formerly Deutsche Annington Immobilien, Germanyâs largest residential real estate player, last month reported that its funds from operations more than doubled in the first half of the year to âŹ264.3 million from âŹ130.3 million a year earlier. JPMorgan Cazenoveâs European property analyst, Tim Leckie, described the figures as âpositiveâ and in line with the bankâs upbeat view of the company.
He has the stock at Overweight with a âŹ32.50 price target. It closed on Friday at âŹ29.57.
Among retailers, says Chammas, many apparel and food âdiscountersâ in the United Kingdom have generated strong growth that should go further. âOnline retailers continue to see positive momentum, and it is another area that we expect positive growth from,â he says.
RBC Capital Markets analyst Richard Chamberlain says a challenging summer for European apparel retailers is likely to give way to a stronger fall and winter period. Among others, he favors undervalued British stocks, such as Debenhams (DEB.UK). Last week, he upgraded the company to Outperform with a 100-pence ($1.53) price target. He expects Debenhams to post its first full-year pretax profit in four years in October, something he says isnât currently factored into the share price. The stock closed Friday at 74 pence.
http://www.barrons.com/articles/european-retail-and-real-estate-stocks-headed-higher-1441434108
Enterprising Investor
9 years ago
Commerzbank Profit Up on Revenue, Taxes (8/03/15)
German bankâs performance owed largely to midsize corporates and retail customers
By Eyk Henning
FRANKFURTâ Commerzbank AG said Monday that second-quarter net profit more than doubled as the German bank increased revenue and paid less tax.
Net profit for the period was âŹ280 million ($307.23 million) compared with âŹ100 million a year earlier and against analystsâ forecasts of âŹ245 million.
The upbeat performance was owed largely to the strength of its business with midsize corporates and retail customers. Germanyâs second-largest bank by market value said that helped boost revenue by more than 9% to âŹ2.42 billion compared with âŹ2.24 billion a year earlier and against âŹ2.4 billion expected by analysts.
âThe substantially improved operating profit in the first six month of the year is clear testimony to the successful turnaround achieved by Commerzbank,â Mr. Blessing said. He reiterated that the bank aims to pay a dividend for 2015 next year, the first since 2008. It aims to pay out 40% of its net profits in dividends to shareholders, finance chief Stephan Engels said. The news helped lift Commerzbank by around 2%.
The earnings gains were made despite a roughly âŹ100 million hit taken by the bank on the sale of unwanted commercial real estate and shipping portfolios worth more than âŹ3 billion.
But, as with its larger domestic rival, Deutsche Bank AG , Commerzbankâs net profit was also propelled by a dwindling tax ratio, which fell to 22% from around 50% a year earlier. âThe tax rate should float around 25% for the full year,â Mr. Engels said.
The partially state-owned lender is trying to boost growth after repaying most of the âŹ16 billion in state aid it received at the height of the financial crisis in 2008. Chief executive Martin Blessing, one of the few European bank CEOs to have remained in place since the crisis, is refocusing the lender as an adviser to midsize companies and as a retail bank, alongside a lean investment bank and its Polish unit, mBank. Operating profit in these units rose to âŹ641 million from âŹ442 million.
While the bank has made progress in adapting to tougher capital rules, it still needs to work on its profitability, said Equinet analyst Philipp Hassler. Commerzbankâs overall net return on equity stood at around 4% in the second quarter, its equity capital ratio, a measure how well it can absorb losses, rose to 10.5%.
Mr. Engels said the bank is continuously working on profitability by cutting costs, but said it didnât plan a broader cost-cutting program. In contrast to Commerzbank, domestic rivals including Deutsche Bank AG and Italian bank UniCredit SpAâs German unit HVB, have cost-cutting programs in place and have or are working on shedding retail branches.
http://www.wsj.com/articles/commerzbank-profit-up-on-revenue-taxes-1438580348
Enterprising Investor
10 years ago
Commerzbank Said Poised for U.S. Settlement to End Probes (3/09/15)
By Keri Geiger and Greg Farrell
(Bloomberg) -- Commerzbank AG is poised to put a half-decade of legal woes behind it as it prepares to settle parallel U.S. investigations into sanctions violations and allegations about the bankâs role in one of Japanâs biggest accounting scandals, according to two people familiar with the matter.
The bank is prepared to enter this week into an agreement with the Justice Department to avoid at least three criminal prosecutions, one of the people said. It will pay as much as $1.45 billion in settlements with nearly a half-dozen government agencies, which also include the Manhattan District Attorney, the Federal Reserve and the U.S. Treasury Department.
New Yorkâs Department of Financial Services will require the bank, Germanyâs second-largest lender, to install a monitor and will seek senior executivesâ resignations, said the two people familiar with the investigation, who asked not to be named because the discussions arenât public.
Duncan King, a company spokesman, and spokesmen for the government agencies, all declined to comment.
The settlement is notable for combining investigations of two distinct areas into one deferred-prosecution agreement, a deal that puts pressure on the bank to overhaul its compliance and regulatory functions.
Blacklisted Countries
In one of the probes, officials have investigated whether the bank violated U.S. sanctions laws by doing business with countries blacklisted by the Treasury Department, including Iran. Commerzbank is among more than a dozen banks that have been under scrutiny for sanctions violations over the past decade.
In the second case, it had been scrutinized for failing to report suspicious activities at Olympus Corp., whose $1.7 billion accounting scandal shook Japan in 2011.
Commerzbank last year bolstered the money it reserves for legal issues. Record low interest rates and faltering economic growth in Europe have made it harder for the company to hit its targets, Chief Executive Officer Martin Blessing has said.
Germanyâs federal government still has a 17 percent stake in the bank after bailing it out in 2009 in the wake of the financial crisis.
The U.S. Attorney for the District of Columbia is expected to file Commerzbankâs deferred-prosecution agreement as early as Tuesday, according to the people. The firm will pay at least a combined $1.45 billion to the Justice Department, the Federal Reserve, the Manhattan District Attorneyâs office and New Yorkâs DFS.
Accounting Fraud
The firm had been under investigation by the Manhattan District Attorney for years over potential sanctions violations when federal prosecutors in Manhattan opened a separate probe over violations related to the $1.7 billion accounting fraud at the Japanese maker of cameras and endoscopes.
In 2012 three former Olympus executives including ex-Chairman Tsuyoshi Kikukawa pleaded guilty for covering up losses for 13 years starting in the 1990s. A former Commerzbank banker admitted in court in 2013 to aiding the conspiracy. He has cooperated with the governmentâs probe in hopes of leniency.
Of the total settlement, $610 million will go to New Yorkâs DFS, of which $300 million for money-laundering violations and $310 million for sanctions breaches, one of the people said. An additional $300 million will go to the U.S. Attorney for the Southern District of New York for money laundering violations, $170 million to the Justice Department for sanctions violations and $170 million to the District Attorney of New York, also for sanctions violations, the person said.
Finally, $200 million will go to the Federal Reserve and the penalty due the Office of Foreign Assets Control, which is part of the Treasury Department, will be satisfied by the bankâs payment to the Justice Department, the person said.
Big European financial firms including HSBC Holdings Plc, Deutsche Bank AG and Barclays Plc have consented to monitors in accords with U.S. authorities in recent years. In December, U.S. prosecutors said Standard Chartered Bank Plcâs oversight from a 2012 settlement would be extended for three years and include an independent monitor for its sanctions-compliance program after investigators got new information on how the firm handled certain international transactions.
http://www.bloomberg.com/news/articles/2015-03-09/commerzbank-said-poised-for-u-s-settlement-to-end-probes
Enterprising Investor
10 years ago
Commerzbank recovery takes hold (2/12/15)
Germany's second largest lender has surprised analysts by logging a higher-than-expected profit in 2014. Commerzbank is half-way through a post-crisis recovery plan, but still struggling amid challenging conditions.
In 2014, Commerzbank earned seven times more than in the previous year, with income boosted by lower restructuring costs and a better operating performance.
Germany's second largest lender published its full-year report on Thursday showing bottom-line net profit rising to 602 million euros ($682 million) from a meager 81 million euros a year earlier.
In the fourth quarter alone, net profit jumped by 20 percent to 77 million euros, according to the bank. Underlying or operating profit increased by 40 percent to 1.022 billion euros in the whole of 2014, while full-year revenues slipped by 2.0 percent to 9.092 billion euros.
"We have increased operating profit ... and significantly improved our capital base through our own efforts," said Chief Executive Martin Blessing. "In a challenging environment we have posted further growth, have made more loans and increased market share," he added
Better prospects, but no dividend
Commerzbank, which received an 18 billion euro ($23 billion) government bailout in 2009, has sold underperforming assets and slashed its balance sheet. Its retail banking business won over 532,000 new clients last year under efforts to increase the segment's operating profit to 500 million euros by the end of 2016.
Moreover, Commerzbank was able to reduce its bad-bank liabilities by 32 billion euros, down 28 percent, as it was able to sell underperforming mortgages and real estate loans to the tune of 20 billion euros.
But the lender's target of reaching a 10 percent return on equity (ROE) - a key measure of a bank's profitability - by 2016, still appears out of reach. In 2014, ROE was 7.3 percent.
Looking ahead, CEO Blessing said the market environment was "likely to remain challenging in 2015." Nevertheless, Commerzbank intended to bring about a further increase in business volume and in revenues from its core banking activities. Operating expenses were set to remain stable at approximately 7.0 billion euros.
Blessing also announced that Commerzbank would not pay a dividend for 2014, making 2007 the last year in which the bank shared profits with investors.
http://www.dw.de/commerzbank-recovery-takes-hold/a-18250951
Enterprising Investor
10 years ago
Commerzbank Second-Quarter Profit Rises as Bad Assets Cut (8/07/14)
By Shane Strowmatt
Commerzbank AG (CBK), Germanyâs second-biggest bank, said second-quarter profit more than doubled as the bank shed unwanted assets.
Net income rose to 100 million euros ($134 million) from 40 million euros a year earlier, the Frankfurt-based company said in a statement today. The average of 12 analyst estimates compiled by Bloomberg was for a 127 million-euro profit.
Commerzbank is expanding lending to German consumers and companies while winding down soured shipping and real estate assets as part of an 18.2 billion-euro bailout. Commerzbankâs finances are under scrutiny by the European Central Bank which is reviewing balance sheets of the regionâs biggest banks and conducting stress tests before taking over as their supervisor in November.
âTheyâve made progress on the cost side, but itâs still a difficult environment on the income side,â Christian Hamann, an analyst at Hamburger Sparkasse, said by telephone yesterday. âThe low interest rates are leading investors to buy riskier portfolios, which pushes along the sale of noncore assets, even if itâs bad for the income side.â
Operating profit was 257 million euros, up from 74 million euros in the second quarter of last year. The average estimate of 11 analysts was for 221 million euros. Provisions for risky loans decreased to 257 million euros from 537 million euros a year earlier.
Commerzbank shares dropped 0.7 percent to 10.41 euros in Frankfurt trading yesterday, valuing the company at 11.8 billion euros. The shares are down 11 percent this year, while the benchmark Bloomberg Europe Banks and Financial Services Index fell 3.5 percent in the same period.
Commerzbank said it will cut assets at its noncore unit, where it bundles public and commercial real estate, ship financing and public debt set to be sold, faster than previously expected. Commerzbank previously expected to reduce noncore assets to 75 billion euros by the end of 2016.
Asset Disposals
In June, Commerzbank agreed to sell 5.1 billion euros of commercial real-estate loans in Spain and Japan and non-performing loans in Portugal, including 1.4 billion euros of loans that the bank classified as non-performing. The sale will drop risk-weighted assets by 3.2 billion euros, Commerzbank said at the time.
âA lot of the assets theyâve sold were in the higher-risk block of commercial real estate, so thatâs quite encouraging,â Karl Morris, an analyst with Keefe, Bruyette & Woods, said by telephone Aug. 5. Morris has an underperform rating on the stock with a target price of 11.30 euros.
The common equity Tier 1 ratio was 9.4 percent, up from 9 percent at the end of the first quarter.
http://www.bloomberg.com/news/2014-08-07/commerzbank-second-quarter-profit-rises-as-bad-assets-cut.html
Enterprising Investor
10 years ago
German Unemployment Drops for First Time in Three Months (7/31/14)
By Stefan Riecher
German unemployment fell for the first time in three months in a sign that Europeâs largest economy is gathering pace after a second-quarter slowdown.
The number of people out of work dropped a seasonally adjusted 12,000 to 2.9 million in July, the Nuremberg-based Federal Labor Agency said today. Economists forecast a decline of 5,000, according to the median of 31 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.7 percent, the lowest level in more than two decades.
Germany has led the euro areaâs recovery and a survey by GfK SE shows that consumer confidence in August will be the strongest since 2006. The Bundesbank predicts that while the nationâs economic growth may have stagnated in the three months through June, it will pick up again this quarter.
âThereâs no need to be concerned about the German economy or its labor market,â said Andreas Moeller, an economist at WGZ Bank in Dusseldorf. âGermany is still outperforming most of Europe and itâs competitive even if wages were to increase a bit.â
Bundesbank President Jens Weidmann said this week that signs of labor shortages are increasing and that thereâs âpractically full employmentâ in a range of industries. Wages nationally could rise by around 3 percent, he told Frankfurter Allgemeine Zeitung.
Porsche, Osram
The tight labor market may limit the scope for employment gains. Osram AG (OSR), the worldâs second-biggest lighting company, said this week it will cut an additional 1,700 jobs in Germany and 6,100 elsewhere to safeguard earnings. Porsche AG, the sports-car maker which is part of Volkswagen AG (VOW), says its hiring of about 1,000 employees annually over the next five years will be mostly outside its home country.
The number of people out of work fell by 5,000 in western Germany and 7,000 in the east, todayâs report showed.
The German economy expanded 0.8 percent in the first three months of 2014. Thatâs twice as fast as the previous quarter and four times as fast as the euro area as a whole.
The jobless rate in the 18-nation currency bloc probably held at 11.6 percent in June and inflation remained at 0.5 percent in July, according to separate Bloomberg surveys before figures from the European Unionâs statistics office today. The reports are scheduled to be published at 11 a.m. in Luxembourg.
European Central Bank President Mario Draghi last month unveiled a range of measures including targeted long-term loans for banks and a negative deposit rate to fight low inflation and boost growth in the region. He said in April that his âbiggest fearâ is a stagnation that leads to high unemployment becoming structural.
http://www.bloomberg.com/news/2014-07-31/german-unemployment-drops-for-first-time-in-three-months.html
Enterprising Investor
11 years ago
Commerzbank Revival Falters as Targets Seen Eluding CEO (6/01/14)
Martin Blessing is one of the most resilient bank chiefs in Europe. He has remained at the top of Germanyâs Commerzbank AG (CBK) since 2008 even after an ill-fated takeover, a record loss and a writedown on Greek debt.
Now, after he revamped the bank by selling assets and cutting costs, shareholders are questioning whether the chief executive officer can generate profits that meet expectations in the face of a sluggish economy, tough capital requirements and a European Central Bank review of asset quality.
âCommerzbank has pushed along a turnaround as far as it could itself,â said Michael Seufert, an analyst at Norddeutsche Landesbank Girozentrale in Hanover, Germany. Now âprofitability depends on customers losing their euro-crisis fears and interest rates picking up.â
Shares in the Frankfurt-based company, which more than doubled during the second half of last year, have fallen 19 percent since April 4. The bankâs 0.51 price-to-book ratio, a measure investors use to gauge a firmâs value, is lower than that of any of the 42 other members of the Bloomberg Europe Banks & Financial Services Index.
Germanyâs second-largest bank handed over a 25 percent stake to the government in 2009 in return for an 18.2 billion-euro ($24.8 billion) bailout. In an effort to turn around the firm, Blessing, 50, added about 245,000 new consumer-banking customers last year and cut so-called noncore assets by 36 percent in the 18 months through the first quarter. While the former McKinsey & Co. partner has shrunk those unwanted soured shipping and commercial real estate loans as well as government debt, it has become more difficult to generate profit with the remaining parts of the bank.
Missing Estimates
Commerzbank last month reported first-quarter profit of 200 million euros, less than the 227.1 million-euro average estimate of eight analysts surveyed by Bloomberg. While profit compared with a loss of 98 million euros a year earlier, it was about half of the average 397 million euros reported in the four quarters before Blessing became CEO in May 2008. Net interest income, the difference between the interest the bank earns and pays, fell 17 percent.
âTheyâre not making money, and that wonât change anytime soon, even without noncore assets,â Dirk Becker, an analyst with Kepler Cheuvreux, said by telephone from Frankfurt.
Banker Family
Blessing, who earned a masterâs degree in business administration from the University of Chicago in 1988, comes from a family of bankers. His father, Werner Blessing, was on the management board of Deutsche Bank AG (DBK); grandfather Karl was a former president of the Bundesbank; and wife Dorothee was co-head of investment banking for Germany and Austria at Goldman Sachs Group Inc. until last year.
After seven years at McKinsey, Blessing joined Commerzbank in 2001 and became CEO in May 2008. He hung onto his post after leading a costly takeover of Dresdner Bank in August 2008 and surviving a record loss of 4.54 billion euros in 2009 and a 2.23 billion-euro writedown on Greek debt in 2011. More than 25 of his counterparts in Europe lost their jobs during and after the financial crisis.
While investors have shifted their sights to weak earnings, Blessing remains optimistic about the bankâs turnaround.
âAt the moment, the glass is a little bit more than half full,â Blessing said at the bankâs Frankfurt headquarters, a 259-meter (850-foot) skyscraper thatâs the cityâs tallest. âCost management isnât done. Itâs an ongoing process, and it probably wonât go away for the next 10 or 15 years. Two percent to 3 percent efficiency gains are needed on an annual basis.â
âBoat Afloatâ
The turning point, Blessing said, came last summer as he used funds from a 2.5-billion-euro capital increase to repay financial aid and sold the bankâs U.K. real estate unit, which had 5 billion euros of loans, to Wells Fargo & Co. (WFC) and Lone Star Funds to comply with conditions of the bailout.
Commerzbank has received offers in excess of 3 billion euros for Spanish real estate loans with a face value of more than 4 billion euros, Bloomberg News reported in March. Blackstone Group LP (BX) and Lone Star are among the bidders, two people with knowledge of the matter said.
The remaining unwanted assets comprise almost one-fifth of the bankâs 574 billion-euros total.
âBlessing has kept the boat afloat, even though itâs still moving very slowly,â Klaus Nieding, vice president of DSW, a proxy-voting group for small investors with almost 500 million euros invested in German firms, said in a telephone interview. âHeâs making progress.â
Niedingâs words contrast with comments a year ago that âmanagement is not at all credibleâ after âan orgy of capital increases.â
Revised Goals
Blessing set more ambitious goals for strengthening capital and reducing unwanted assets in February. The bank will shrink those assets to 75 billion euros by the end of 2016 rather than to a previous target of less than 90 billion euros, he said.
The revisions came after the euro-area economy exited its second recession in five years in the fourth quarter, expanding 0.5 percent, and the ECBâs main refinancing rate dropped to a record low of 0.25 percent.
âThe search for yield is driving investors toward riskier investments, which has pushed along the reduction of noncore assets faster than you would have expected a year ago,â said Philipp Haessler, an analyst at Equinet Bank AG in Frankfurt, who recommends investors hold Commerzbank stock.
Commerzbankâs capital-adequacy ratio under Basel III rules, a measure of financial strength, will exceed 10 percent by 2016, beating a previous target of 9 percent, Blessing said. The ratio was 9 percent on March 31, unchanged from the end of December.
Past Failures
Some analysts and investors donât believe he will deliver on his targets, pointing to past failures. They also question a plan to invest 1 billion euros in the consumer bank because margins of 5.7 percent at the end of last year were less than one-third those at Mittelstandsbank, the most profitable unit, which serves small and medium-size companies. Blessing is spending the money on online banking and revamping branches.
Blessing failed to meet profit goals he set in May 2009. At the time, he forecast 2012 operating profit of 4 billion euros and an after-tax return on equity of 12 percent. Operating profit ended up at 1.2 billion euros and return on equity was zero. In November 2011, he said the plan was no longer achievable, citing volatile global markets.
Government Support
Blessing joined Commerzbank as the management board member responsible for consumer banking. He was known for his drive and down-to-earth communication style during his tenure at McKinsey, which included working with German banks looking to modernize during the 1990s, said Frank Mattern, a managing partner at the firm who worked with Blessing.
âMartin was not only great at conceptual, strategic work, but also at motivating and energizing,â Mattern said in a phone interview. âHe could implement change -- do it himself.â
Blessing steered the bank clear of the scandals involving manipulation of benchmark interest rates and currencies that led to the departures of CEOs including Robert Diamond of Barclays Plc and Rabobank Groepâs Piet Moerland. He also kept the support of the government as some investors sought a change in management last year, a German government official who asked not to be identified said at the time.
Commerzbank was founded in Hamburg in 1870, the same year Deutsche Bank, Germanyâs biggest bank, was formed. It was privatized during the financial crisis of the 1930s, and at the end of 2013 had about 1,200 consumer-banking branches with more than 11 million customers.
Luring Depositors
The bank is paying cash to new deposit holders. It set a target in November 2012 of adding 1 million consumer-banking clients by the end of 2016. In April, Commerzbank began offering 100 euros to open a deposit account, raising the payment from 50 euros. Deutsche Bank, Commerzbankâs main competitor for deposits, charges account-holders a monthly fee of five euros, according to its website.
While analysts including Becker of Kepler Chevreux criticized the strategy on cost grounds, Dennis Bartel, a spokesman for the company, said upfront expenses are lower than for traditional advertising. New client business becomes profitable in the second year on average, he said.
Investors also are eyeing any moves by the government to sell all or part of its remaining 17 percent stake in the bank. In August, Finance Minister Wolfgang Schaeuble said no immediate sale is planned and the ministry is accounting for the price at which it bought the shares when deciding when to sell.
To break even on its investment, the government would need to find buyers for its remaining 193.5 million shares at about 25.90 euros each, more than twice the current stock price, data compiled by Bloomberg show.
Legacy Assets
In the meantime, Commerzbank remains weighed down by its legacy assets, which generated an operating loss of 1.1 billion euros last year, offsetting the 1.1 billion euros of operating profit at its Mittelstandsbank.
In a few years, those assets will no longer be a major burden on earnings and the bank âwill clearly be profitable,â Haessler of Equinet said.
âTheyâre on the right path with the reduction of noncore assets but still need to work on profitability at the core bank and particularly retail banking,â he said. âItâs not time for a pat on the back yet, but the bankâs definitely stronger now than this time last year.â
To contact the reporter on this story: Shane Strowmatt in Frankfurt at sstrowmatt@bloomberg.net
To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Mark Bentley, Robert Friedman
Enterprising Investor
11 years ago
What Investors Need to Know About Commerzbank AG (ADR) (5/27/14)
In the U.S. market, most investors looking for German banks tend to focus on Deutsche Bank (NYSE: DB ) . While Deutsche Bank certainly does deserve attention considering it's Germany's largest bank, that nation's second largest bank is often overlooked.
Having taken quite a beating during the financial crisis, Commerzbank (NASDAQOTH: CRZBY ) is on the rebound as profits return and non-core assets are disposed of. Wise investors should take notice.
Share dilution
Government assistance for banks was hardly unique during the most recent downturn, and Commerzbank was no exception. Commerzbank accepted a 18 billion euro bailout while rival Deutsche Bank escaped without one (although some former employees alleged Deutsche Bank hid $12 billion of losses to avoid a bailout). But bailouts aren't free to shareholders, and these investors paid the price through a massive wave of share dilution.
The government stake in Commerzbank fell below 20% in 2013 from 25% previously. However, this was largely due to the bank's 2.5 billion euro capital raise further diluting shareholders. As a bank struggling to raise capital, share dilution was unavoidable during the crisis, but investors in Commerzbank should not expect to see the pre-crisis highs again for a long time, if ever, because of the magnitude of the dilution.
Dividends?
With European stress tests coming up, Europe's banks are shedding non-core assets and looking to raise and preserve capital on favorable terms. Not too surprisingly, Commerzbank is not paying a dividend leading up to the stress test results.
Commerzbank CEO Martin Blessing wants to get the results from the ECB stress tests before any dividend action is taken. Considering the potential share dilution from finding a capital deficiency and having to issue new shares, holding off on a dividend for the time being is probably a smart move.
So Commerzbank shareholders should not expect big dividends anytime soon. Even after the results are released, the bank will probably start out small and build a meaningful dividend over time. For now, Commerzbank is not a stock for income investors, but if the turnaround continues, it may one day deserve another look.
Government stake
Currently holding a 17% stake in Commerzbank, the German government does not appear to be in any hurry to divest itself of the bank. Instead, a report in Spiegel says the government is holding out for a higher price until 2016. Reuters notes the government did not comment on much, but a finance ministry spokesperson said, "The German government has no plans to sell its stake."
With this government strategy, Commerzbank will have to wait longer to shake off the image of government ownership. However, the government stake should not be a major operational issue since the 17% stake is small enough that Commerzbank can make its own decisions.
Valuation
Commerzbank trades about where one would expect a zero-dividend paying partially government-owned bank to trade. At about half of book value, the bank trades at a sharp discount to its more stable rivals. Trading around 18 times forward earnings, Commerzbank shares look overvalued, however, earnings are expected to rise sharply in the following years as the economy recovers and more non-core assets are disposed of. Of course, forward earnings estimates can be off, so investors should still run their own numbers.
At this point, Commerzbank carries a lower valuation than many other major banks, but it does so because of increased risk, partial government ownership, and the lack of a dividend. With this in mind, Commerzbank sets itself up best as a recovery play. If the bank can continue to dispose of non-core assets, as it's been doing while turning earnings performance around, there is upside to be had as the bank moves closer to peer valuation. At the same time, the bank continues to face stress test and economic risks, making this far from a blue-chip bank stock.
Recovery bank
Commerzbank ran into billions of euros worth of trouble during the financial crisis as it had a major role in shipping and real estate loans, two of the areas hit hardest by the financial crisis. After taking a government bailout and having enough share dilution to push the bank to run a 1 for 10 reverse stock split, Commerzbank is profitable again and continues to weed out non-core assets.
Primarily because of its low price to book value, Commerzbank looks to be a recovery/value play for risk-tolerant investors with a long-term outlook. For investors looking to diversify their European bank holdings or find European recovery plays, Commerzbank is worth a further look.
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Alexander MacLennan owns shares of Commerzbank. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
http://www.fool.com/investing/general/2014/05/27/what-investors-need-to-know-about-commerzbank.aspx
Enterprising Investor
11 years ago
Lone Star, J.P. Morgan Near Purchase of Spanish Loans (5/21/14)
MADRIDâ Commerzbank AG is in final-stage talks to sell a multibillion-euro portfolio of Spanish real-estate loans and assets to Lone Star Funds and J.P. Morgan Chase, the latest showing of renewed interest in one of the most-battered property markets in Europe.
According to people familiar with the talks, the two U.S. investors will pay between âŹ3.7 billion and âŹ3.9 billion (between $5 billion and $5.3 billion) for the portfolio, which includes loans with a face value of about âŹ4.5 billion that are backed by shopping centers, hotels and offices.
The deal, which one of the people said may close within a month, would be the largest property transaction in Spain since the country's real-estate bubble burst six years ago and illustrates foreign investors' renewed appetite for assets in the financially stressed euro-zone countries of Europe.
Under the terms of the proposed deal, known by the code name Project Octopus, Lone Star would acquire the majority of the loans in the portfolio, while J.P. Morgan will acquire a minority and provide the financing for the deal, one person said.
Demand for Spanish real-estate loans and assets has recovered dramatically over the past year, as investors grow more confident that the worst of the financial crisis has passed. There were $1.5 billion worth of commercial real-estate transactions in Spain in the first quarter of 2014, up from $410.9 million during the same period last year, according to data from Real Capital Analytics.
The sheer size of Project Octopus could help transaction volumes keep rising, as Lone Star sells and restructures parts of the loan book, said Federico Montero, a partner in corporate finance at real-estate broker Cushman & Wakefield. "The good news is that you have a private equity investor with these loans now," he said. "Things will move faster than they were with a German bank."
The auction, run by investment bank Lazard Ltd., initially attracted more than a dozen large international investors, many of which had teamed up with financial institutions to bid.
Blackstone Group LP, Cerberus Capital Management and Apollo Global Management were leading three of the four consortia in the final stages of the Project Octopus bidding. U.S. private-equity funds have helped drive the activity in Spain, as well as in Ireland and Italy, as they search for distressed real-estate assets.
The loans were originally extended by Eurohypo AG, a unit of Commerzbank that is being wound down after suffering large losses in recent years.
The proposed deal would be structured in a similar way to the sale of Commerzbank's £4 billion ($6.73 billion) U.K. real estate portfolio last year, people familiar with the talks said. Loan Star bought the U.K. portfolio together with Wells Fargo & Co.
The next closely watched portfolio sale in Spain is Project Hercules, a âŹ6.95 billion portfolio of mostly residential mortgages. The loans are held by Catalunya Banc SA, a once-prominent regional lender that was nationalized in 2011.
Investors are also circling Realia SA, a troubled builder that is cleaning up its balance sheet and looking for funds willing to inject money into the company. In a deal announced Tuesday, Realia said it had agreed to sell a majority stake in SIIC de Paris to France's Eurosic SA for âŹ558.9 million. Realia's two largest shareholders, and Fomento de Construcciones y Contratas SA, are working with Goldman Sachs to find a buyer for their stakes in the company.
http://online.wsj.com/news/articles/SB10001424052702304198504579573401186089522?mod=WSJ_qtoverview_wsjlatest&mg=reno64-wsj
Enterprising Investor
11 years ago
Commerzbank lifts targets as turnaround gains pace (2/13/14)
* Shares jump to 22 month high in early trading
* Increases 2016 target for capital to 10 pct
* To reduce NCA portfolio to 75 bln euros by 2016
* CEO waives bonus as says results not yet good enough
* Q4 pretax profit at 89 mln euros vs 225 mln loss year ago (Adds CEO waives bonus, quotes, updates shares)
By Arno Schuetze and Thomas Atkins
FRANKFURT, Feb 13 (Reuters) - Commerzbank said its turnaround plan was running ahead of schedule, allowing it set more ambitious targets for improving its capital position and shedding weaker assets, and easing investor fears it might need to raise more cash.
Shares in Germany's second-biggest lender, which also posted a small profit for the fourth quarter of 2013, rose more than 3 percent to a 22-month high on Thursday.
Nonetheless, Chief Executive Martin Blessing still waived his bonus, saying 2013 earnings were not convincing enough.
Commerzbank was one of the highest-profile casualties of the global financial crisis after an expansion drive backfired, with the German government spending around 18 billion euros ($24.5 billion) on a bailout of the bank.
It has since been cutting costs and selling assets in a bid to return to health and Blessing said that restructuring was gaining traction, with the bank turning a corner in 2013.
"2014 is year one - after the year of transition," he said.
The bank said its core tier 1 capital ratio - a key measure of financial strength used by regulators - improved to 9.0 percent at the end of 2013 and it set new a target to reach more than 10 percent by 2016.
While less than the 10.3 percent of rivals BNP Paribas and Lloyds at the end of 2013, it is well above the 7.6 percent that Commerzbank posted in 2012.
The German bank also said efforts to wind down its non-core asset (NCA) portfolio, a "bad bank" split off as part of its restructuring, were proceeding more quickly than expected.
It now aims to reduce the unit to 75 billion euros by 2016 from an earlier target of 90 billion, benefiting from a recovery in asset prices.
"My concern was that there could be another cap hike. This concern was wiped away with the numbers on the non-core asset reduction," said Christian Hamann, analyst at Haspa.
At 1130 GMT, Commerzbank shares were up 2.8 percent at 13.76 euros, making them the top gainers among European rivals and bringing to almost 70 percent the amount Commerzbank stock has risen in the past six months.
BAD TO GOOD
Since mid-2013, Commerzbank has struck several deals to reduce its exposure to assets such as commercial real estate and shipping.
"The wind-down unit slowly is getting into a dimension where it is not as frightening anymore as two years ago," Metzler analyst Guido Hoymann said.
Commerzbank's non-core assets stood at 116 billion euros at the end of 2013, comparing with 289 billion in 2008.
Last week it announced the sale of $1 billion in bad Spanish property loans in a bid to clean up its balance sheet and free up capital ahead of European banking health checks.
Profit improved at the bank, mainly due to higher investment banking and retail income as well as lower loan-loss provisions in its non-core asset portfolio.
Blessing said that although Commerzbank swung to a modest 78 million euro net profit for 2013 after a 47 million euro loss last year, he felt he was not entitled to a bonus.
"If there is no profit then I don't think it's right, independent of whether the goals were reached, for the CEO to receive variable compensation," said Blessing, who last received a bonus for 2007.
He added he would have considered accepting the payment if group net profit had been over 100 million euros for the year.
Commerzbank's 64 million euros net profit in the fourth quarter beat analysts' average forecast for 25 million euros. The lender lost 726 million in the year earlier period.
However, operating profit in its cash-cow business - the Mittelstandsbank which caters to Germany's raft of medium-sized companies - fell as the bank needed to set aside more cash to cover potential bad loans.
Levels of provisions overall are normalising after the Germany's economic success in 2012 allowed the bank to reclaim bad-loan reserves it had set aside during the financial crisis.
($1 = 0.7359 euros) (additional reporting by Jonathan Gould and Andreas Doernfelder; Editing by Mark Potter)
http://www.reuters.com/article/2014/02/13/commerzbank-results-idUSL5N0LI0GX20140213
Enterprising Investor
11 years ago
EUROPE MARKETS: Banks, Data Drive European Stocks Higher
By Barbara Kollmeyer, MarketWatch
MADRID (MarketWatch) -- European stocks rose on Tuesday, with banks driving the gains after German jobless figures came in better than expected and Ireland marked a successful return to the international bond market. Broker moves across the board left BASF SE higher and Swedish Match AB lower.
The Stoxx Europe 600 index rose 0.7% to 329.32, with the oil sector helping pad out those gains. The index eased 0.2% on Monday.
Vestas Wind Systems AS was among the biggest movers on the Stoxx 600, up more than 6%. The wind-turbine maker upgraded its free cashflow expectations for 2013 to around 1 billion euros ($1.36 billion).
On the downside, shares of Swedish Match AB were a top decliner, off 5.4% after Citi cut it to sell from neutral, saying competition pressures in Sweden were likely to continue in 2014. It cited specific worries about the cigar sector.
Broker moves triggered action for several companies. Shares of BASF SE added nearly 3% after UBS lifted shares to buy from neutral, saying the company should resume a re-rating trend relative to other big-cap-chemical household names. UBS also cut Air Liquide SA to sell from neutral, triggering a drop of 1.4%, saying shares in the industrial-gas producer should resume underperformance versus BASF.
The German DAX 30 index rose 0.7% to 9,497.03 after data showed seasonally adjusted jobless claims in the country falling 15,000 to 2.97 million in December, which was better than expected. German retail sales data also came in better than expected, with a November preliminary rise of 1.5%.
"If Germany can show an improving labor market, it gives hope to the region overall, although all bar Germany have substantial reform to undertake if they are to match German efficiency," said Stephen Pope, managing partner at Spotlight Ideas, in emailed comments.
European stocks also rose after data showed euro-zone inflation falling back in December, further below the European Central Bank's target.
Tom Rogers, senior economic advisor to the EY Eurozone Forecast, said the central bank will "need to remain alert to the risk of deflation, and following Thursday's Governing Council meeting, be prepared to respond to increased speculation over which policy tools it might use to try and address falling prices."
Banking stocks were the day's best performers, and investors also got encouraged as Ireland successfully sold 3.75 billion euros' ($5.1 billion) worth of 10-year bonds on Tuesday to strong demand, according to news reports. The return to the bond market follows the country's exit from its international bailout program.
The French CAC 40 index rose 0.7% to 4,258.29, with banks such as Credit Agricole SA soaring 7%, BNP Paribas SA up 3% and Societe Generale SA gaining over 4%. Shares of Total SA (TOT) rose 0.8% as the oil sector gained amid strong energy prices.
In Frankfurt, shares of Commerzbank AG jumped 6%, while in London, HSBC Holdings PLC (HSBC) rose 3.4%. BP PLC (BP) gained close to 1%, helping drive the FTSE 100 index up 0.5% to 6,763.16.
Also in London, shares of Severn Trent PLC fell 2% after J.P. Morgan Cazenove cut shares in the water company to underweight from neutral. It cited concerns about rising regulatory risks, and a decreasing likelihood of mergers and acquisitions activity.
A number of technology companies were affected by a note from Barclays analysts on the sector. They said they see a gradual improvement for the European tech sector, but shares of ST Microelectronics NV slid 2% after a cut to underweight from equalweight.
The best performer for Tuesday so far was the Spanish IBEX 35 index , rallying 2.8% to 10,176.40, with Banco Santander SA (SAN) up nearly 4% and BBVA SA (BBVA) up more than 5%%.
Data released Monday from Markit indicated strengthening in Spain helped raise a gauge of the euro zone's services sector and the broader private sector in December.
Enterprising Investor
11 years ago
Commerzbank Sells 14 Tankers to Oaktree Fund to Reduce Bad Loans (12/16/13)
Commerzbank AG (CBK), Germanyâs second biggest bank, sold 14 chemical tankers to a fund managed by Oaktree Capital Management LP, eliminating 280 million euros ($385 million) in bad shipping loans from its books.
The asset sale reduces the volume of non-performing loans at Commerzbankâs Deutsche Schiffsbank ship-finance unit by 6 percent compared with the end of September, the Frankfurt-based lender said in an e-mailed statement today. The ânet capital relief effectâ of 8 million euros means the sale âdoesnât significantly impactâ fourth-quarter earnings, it said.
Commerzbank, which announced its exit from ship financing in 2012, reduced its loan portfolio to the crisis-ridden industry this year by 3 billion euros to 15.7 billion euros as of Sept. 30, Otto said in an interview last month. The German lender is taking over ownership and operation of some ships from clients unable to repay their loans in a bid to salvage some of the debt.
âWe will continue with our consistent strategy of value-preserving reduction,â Stefan Otto, head of the Hamburg-based Deutsche Schiffsbank unit that is part of Commerzbankâs non-core assets, said in the statement.
Germanyâs top shipping lenders, including Commerzbank and HSH Nordbank AG, face rising credit default risks next year as bad debt from clients struggling to emerge from the industry crisis mounts, Moodyâs Investors Service said in a report last week.
Private Investors
Oaktree, Blackstone Group LP (BX), JPMorgan Chase & Co. (JPM) and Tennenbaum Capital Partners LLC are among firms buying new and used German vessels and taking stakes in German shipping companies that need financial backing. They are replacing mostly private investors who for decades participated as limited partners in German ships.
Howard Marks, the chairman and co-founder of Oaktree Capital Group, indicated on Dec. 10 that shipping is one area his company is exploring for further takeovers, at a conference hosted by Goldman Sachs Group Inc. in New York.
âThere absolutely is a paucity of bargain-priced distressed opportunities,â he said, according to a transcript of his comments. âMost of the distressed which is out there is in just a few pockets, shipping, power, non-prime real estate and Europe. And there we find opportunities to put money to work.â
To contact the reporter on this story: Nicholas Brautlecht in Hamburg at nbrautlecht@bloomberg.net
http://www.bloomberg.com/news/2013-12-16/commerzbank-sells-14-tankers-to-oaktree-fund-to-reduce-bad-loans.html
Enterprising Investor
11 years ago
Stock Investors Embark on a European Tour (8/23/13)
Experts Say There Are Stock Bargains to Be Found as EU Economies Rebound
By LIAM PLEVEN and SARAH KROUSE
Things are starting to come together for the continent that almost fell apart.
The economy in the 17-member euro zone is growing againâslowlyâafter contracting for more than a year. Signs of revival are showing up in data on business activity and consumer confidence. As in the U.S., central bankers' extraordinary commitment to injecting cheap money into their economies has so far helped avert disaster. The euro zone hasn't splintered, as some feared, and no country has dropped the common currency.
As worries ease, markets are up from Ireland to Italy. Benchmark national indexes in the U.K., France and Germany have climbed at least 10% this year. The pan-European Stoxx Europe 600âakin to the S&P 500 in the U.S.âis up 19% in the 13 months since Mario Draghi said the European Central Bank, which he heads, was "willing to do whatever it takes to preserve the euro."
Investors planning their own grand investing tour of Europe's stocks should know there still are discounts available. But as many a shopper in the markets of London, Paris or Rome will agree, it can pay to be choosy. For instance, many fund managers see more near-term upside in consumer goods and banks than in European utilities or energy firms.
There are several options for investors. Low-cost index funds, such as the Vanguard FTSE Europe exchange-traded fundâwhich charges 0.12% in fees, or $12 for every $10,000 investedâoffer broad exposure that includes many of the region's global heavyweights. There also are actively managed, Europe-focused funds run by stock pickers who try to beat benchmark indexes, and global funds that feature a hefty dose of European exposure.
In addition, many European companies issue American depositary receipts that trade like shares on U.S. exchanges. Some firms only trade on home-country exchanges, which U.S. investors can access through brokers or international accounts, though this typically involves taking on currency risk and navigating complicated tax rules.
Global fund managers now have more of their portfolios in euro-zone equities than at any point since January 2008, according to a monthly survey Bank of America Merrill Lynch conducted in early August. U.S. investors had poured $3.7 billion into Europe-focused equity funds this month through Wednesday, according to data-provider EPFR Globalâmore than in any full month this year.
Nevertheless, European stocks have generally lagged behind their U.S. counterparts this year. Some investors think Europe's shares could climb higher.
"Europe is in a recovery cycle. It's in a bull-market cycle. And it's earlier in the cycle than the U.S. is," says Michael Shaoul, chairman of Marketfield Asset Management, in New York. He says the firm, which manages $13 billion, has more funds allocated to Europe than any other region outside the U.S.
Companies that focus on domestic European markets may also be in a better position to benefit from any uptick in demand from long-suffering consumers.
"There are much more opportunities in a Spanish media stock, or Europe-focused banks that will benefit from a European recovery, than a global company that has done well through the crisis and has been supported by emerging-market sales," says Dean Tenerelli, a London-based European equity manager at T. Rowe Price Group who manages âŹ1.2 billion ($1.6 billion) in assets.
But the recent rebound also highlights two major risks.
First, many individual stocks have already risen sharply, particularly Europe-based multinationals that get much of their revenue abroad. German insurer Allianz is up 30% over the past year, as is Dutch electronics giant Koninklijke Philips Electronics.
"The easy money has been made," says Philippe Brugère-Trélat, portfolio manager of the Mutual European Fund at Franklin Templeton Investments. The fund has about $2 billion in assets and charges 1.43%. It has gained 23% over the past year through Thursday, according to Morningstar.
The second risk is that Europe's deep problems haven't been solved.
Persistent unemployment, particularly among the young, hampers the outlook for consumer spending and growth. Coming elections in Germany and elsewhere are reminders of the potential for upheaval, and weakness in Europe's export markets could also hit Europe-based stocks.
"There are still plenty of pitfalls," says Tim Stevenson, a manager of the âŹ2.2 billion Henderson Horizon Pan European Equity Fund at Henderson Global Investors in London. The fund isn't open to investors in the U.S.
Stock buyers also need to be alert to how central-bank actions could affect currency movementsâand returns. If the U.S. Federal Reserve tightens monetary policy sooner than the European Central Bank, the dollar could strengthen against the euro, reducing returns for U.S. investorsâthough the shift could also boost the prospects of European companies, particularly exporters.
Despite the caveats, further signs that the old world's economy has new life, such as a rise in corporate earnings, could send European stocks higher, fund managers say.
Here is what investors need to know about industries that could benefit, and the developments that could propel stocks in those areas higher:
Catering to consumers. Any investor betting on a European revival should understand how bad things seem to the average consumer there. Here is a simple way to look at it: 55% of respondents in the biannual Eurobarometer survey released last month believe "the worst is still to come" for the job market.
That counted as good news. In the fall of 2012, 62% of respondents felt that way.
Ordinary Europeans have been so battered during years of crisis that the threshold for improvement is low. That means companies catering to those beleaguered consumers could be among the first to feel the impact if the fledgling economic recovery takes hold.
Among the candidates are firms such as consumer-goods giant Unilever and cosmetics firm L'Oréal, fund managers say. Both are sprawling multinationals, but they also rely on Europe for a significant portion of their sales.
Companies that sell products to relatively well-heeled consumers also could profit from an improving economy, if their customers feel freer to spend. Risteard Hogan, who manages the Fidelity Europe Fund, likes Christian Dior, whose shares are trading at a lower multiple of earnings over the past 12 months than the Stoxx Europe 600, based on FactSet data. Dior's shares are up 17% over the past year.
Mr. Hogan also likes Marr, an Italian food distributor, which he says is "benefiting from consolidation in the domestic market." Marr's shares are up 25% over the past year. The Fidelity mutual fund has $756 million in assets and charges 0.80% in fees, according to Morningstar.
Firms such as Spain's Industria de Diseño Textil, or Inditex, which owns fashion stores such as Zara and Massimo Dutti, illustrate the opportunity and the risk for investors considering buying shares now. The company's shares are up 19% over the past year, in Spanish trading, and are trading at a higher multiple of earnings than the Europe index, according to FactSet.
"Inditex has impressively been able to retain sales growth despite being a Spanish company," says Franz Weis, a fund manager for the âŹ1.2 billion Comgest Growth Europe fund, which isn't distributed in the U.S. He says the company has been able to do this by opening stores in new markets internationally.
Yet Mr. Weis says he reduced his stake in recent months because the stock had become more expensive.
"Sales have been strong, but if there was a recovery, there would be further growth," he says.
Socking money away. The global financial crisis pounded European banks in 2008. They got pummeled again when debt woes seemed poised to torpedo the euro more recently.
That helps explain why some investors think there is still opportunity for European bank stocks to climb higher, even though the Stoxx Europe 600 Banks, an index that tracks the performance of 47 large banks, has already risen 29% over the past year.
But given the persistent and often unpredictable risks banks faceâand the fact not all of them maximized the opportunity to boost their capital in recent yearsâthis is one sector where it is particularly important to be picky. Regulatory pressure to shore up balance sheets and sell assets also poses challenges for the region's banks.
Mr. Tenerelli of T. Rowe Price highlighted Société Générale as one strong bank stock. The French bank said earlier this month that second-quarter net profit more than doubled from a year prior. "I think financials are still a great opportunity, and I think they are going to be multiyear recovery stocks," he says.
The bank's shares have risen 68% in the past year but are trading at a lower multiple of earnings than the Stoxx Europe 600, according to FactSet.
Ann Steele, a London-based fund manager at Threadneedle Investments, a unit of Ameriprise Financial, says she has increased holdings of Swiss bank UBS over the past year, and it now represents 3% of the portfolio in the Threadneedle Pan European Fund she manages. The fund isn't available to U.S. investors.
UBS restructured its investment bank last year and is increasingly focused on wealth and asset management, which she thinks improves the bank's outlook. Shares in UBS are up 74% over the past year.
"I think there's much more room" for the stock to rise, she says. Ms. Steele says that, even though UBS trades "like an expensive bank" today, she thinks its focus on wealth management gives it further potential for gains.
Nicholette MacDonald-Brown, a London-based fund manager who runs the Schroder ISF European Total Return fund, favors DNB, a Norwegian financial-services group. Shares are up 46% in the past year in Oslo trading. By some measures, shares are trading at a lower valuation than the Europe index.
For investors seeking broad exposure, the iShares MSCI Europe Financials ETF holds shares of many of the region's largest financial firms, including banks and insurers. The fund has $183 million in assets and charges 0.48% in fees. Shares are up 39% over the past year.
Hitting the road. High unemployment, austerity measures and recession also have kept many Europeans closer to home.
Fund managers who are bullish on the sector are betting livelier consumers may get out and about more often, generating business for airlines, toll-road operators and the like.
Toll-road operators in Spain, Italy and Portugal all reported drops in traffic volumes in the first half of the year, a trend highlighted in a recent note from Moody's Investors Service. The ratings firm highlighted first-half traffic figures from Atlantia ATL.MI 0.00%in Italy, Brisa Concessão Rodoviária in Portugal and Società Iniziative Autostradali e Servizi as challenges for the firms.
Some fund managers say this presents a buying opportunity for those companies, because traffic is down disproportionately to declines in gross-domestic-product growth in those markets.
Atlantia is one of the biggest holdings in the Europe fund that Ms. MacDonald-Brown runs. Its shares are up 25% over the past year. The firm is "very exposed to any form of recovery," she says.
Discount airlines such as Ryanair Holdings and easyJet remain popular choices in the airline sector. Ms. Steele of Threadneedle says International Consolidated Airlines Group has upside following the restructuring of Iberia, one of its airline brands, and signs of a mild recovery in Spain.
"Iberia has the potential to contribute more than it has to date," she says. Shares have more than doubled over the past year, in London trading.
Mr. Brugère-Trélat's Franklin fund has French hotel firm Accor as one of its top holdings. As the company increasingly licenses its hotel brands, such as Sofitel and Ibis, and lowers the proportion of properties it runs, it will see a "significant increase in the return on capital employed," he says.
Keeping aging Europeans healthy. While many fund managers focus on which sectors will benefit if the economy keeps improving, others are finding opportunities in the continent's aging population and its rising health-care needs.
Simon Edelsten, fund manager of the £36 million ($56 million) Artemis Global Select Fund, said European health-care stocks look like a better value than other sectors there. The fund invests globally, but about 20% of its assets are invested in European stocks. The fund isn't distributed to U.S. investors.
"It's the more cyclical areas that we've been cautious about," Mr. Edelsten said.
Thorsten Winkelmann, manager of the âŹ4.4 billion Allianz Europe Equity Growth fund at Allianz Global Investors, favors Novo Nordisk . The Nordic pharmaceuticals company recently raised its earnings estimates and said it is expecting sales growth of 11% to 13% for the year. One of its strengths is in products for people with diabetes.
Novo Nordisk's shares have risen 4% over the past year, in Danish trading. The Allianz fund isn't available to U.S. investors.
U.K. health-care company GlaxoSmithKline, Germany's Bayer, French drug company Sanofi and Swiss pharmaceutical company Novartis were other top picks for European equity-fund managers.
The stocks are often among the top holdings of ETFs offering sector-specific exposure globally. For example, BlackRock's iShares and State Street Global Advisors' SPDR ETF unit both offer funds for U.S. investors that give investors exposure to the health-care sector world-wide.
Write to Liam Pleven at liam.pleven@wsj.com
A version of this article appeared August 24, 2013, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: Stock Investors Embark on a European Tour.
http://online.wsj.com/article/SB10001424127887323980604579028843275327248.html?KEYWORDS=investors+embark
Enterprising Investor
11 years ago
Commerzbank Posts Small Profit In 2Q (8/08/13)
FRANKFURT--Commerzbank AG (CBK.XE) Thursday posted a small net profit for the second quarter, as high provisions for potential losses on loans, writedowns on assets and pressured revenues overshadowed some improvements in restructuring Germany's second largest lender.
Net profit fell 84% to EUR43 million ($57 million) from EUR270 million, better than forecast, as provisions--such as for some commercial real estate and public finance assets--rose 34% to EUR537 million from EUR404 million, but were below the forecast EUR551 million. Net interest income, the main revenue driver, fell 8.7% to EUR1.63 billion from EUR1.78 billion, above the forecast EUR1.38 billion.
Commerzbank has said that 2013 will be a year of transition in its four-year restructuring plan to strengthen its four main business units by 2016, while shedding other assets that were transferred to an internal "bad bank" a year ago. In 2013, the bank expects loan loss provisions to remain above 2012 levels as it gradually reduces the bad bank's assets, which include public finance, commercial real estate finance and ship finance portfolios.
Costs will be capped at EUR7 billion, and revenues in the retail bank and in the business with German medium-sized banks will steady, the bank said. The assets in the bad bank will drop well below EUR90 billion by the end of the year, helped by the sale of a portfolio of U.K. commercial real estate loans worth around EUR5 billion in the second quarter.
Under the plan announced in November, Commerzbank plans to cut 5,200 jobs, reduce the group's costs compared with revenues and invest in retail operations to grow its customer base and revenues. Together, the retail bank, the business with German medium-sized companies, the small investment bank and the Central and Eastern European business are targeting an after-tax return on equity of above 10%, a cost-income ratio of around 60%, and a 9% key capital ratio under future regulations for European banks by 2016. The bank hopes to achieve the 9% capital ratio by the end of 2014.
In the second quarter, Commerzbank raised EUR2.5 billion in capital to wean itself off the German government aid that was needed in early 2009, by repaying the final part of non-voting shares the government held. The government now only holds a 17% equity stake in the bank.
Due to the U.K. portfolio sale, risk-weighted assets were reduced by EUR1.5 billion, but there will be charges of EUR179 million in 2013, the bank has said. Of this, around EUR134 million would be booked in the second quarter, Commerzbank said.
It also reduced the assets in the bad bank further in the three months to June, by EUR7 billion to EUR136 billion. With the U.K. portfolio sale, that number will drop to EUR131 billion.
Write to Ulrike Dauer at ulrike.dauer@dowjones.com
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56Chevy
11 years ago
