European banks – another strong quarter supports continued share outperformance.
European bank earnings season is now complete – and it is safe to say it exceeded all expectations. The aggregate pre-tax profit of European banks in 1Q21 was more than triple the level in 1Q20, and perhaps more impressively, almost 20% higher than 1Q19 (and notably, the bank index remains below where it was at the conclusion of the 1Q19 earnings season). The banks collectively beat earnings expectations by an astounding 50%, and this is no one-off as it marks the third consecutive quarter where estimates were beaten by 45% or more. Clearly, the sell-side has plenty of catching up to do and as we look at updated numbers, it does appear the street remains excessively cautious on provisioning estimates and we suspect further upgrades will be forthcoming. Even on current estimates, though, the stocks look significantly too cheap, trading on ~4.5x pre-provision multiples, a healthy discount to historical averages and just half the multiple of where comparable US banks trade. Higher estimates and a cheap valuation is a typically good combination for making money – and higher dividend yields await this fall as well. The long European bank trade still has plenty of room to go, in our view.
Europe macro – taking the baton from the US.
The economic recovery continues to accelerate in Europe, providing a solid backdrop for the European bank story. As the vaccine rollout gathers pace, surveys of both businesses and consumers are starting to reflect increasing optimism towards the recovery. This past week we saw European advance PMIs ratchet to a new high (56.9), driven importantly by the services sector which has been under pressure since the pandemic began and is now above pre-Covid levels. The German IFO expectations index – a strong leading indicator for economic activity – also shot higher this week to a level seen just once in the past decade. As we look forward, elections in Germany could provide a further jolt to fiscal stimulus plans across Europe as the Greens party look well placed to take a prominent role in the new government.
More corporate activity in the US.
M&A bankers continue to be busy on our portfolio holdings in the US. This week BGC Partners (our holding) announced a sale of its insurance brokerage business to the UK firm Ardonagh for $500 mm in cash. This represents nearly 20% of BGCP’s market cap for a business segment that generated less than 10% of group revenues, was barely profitable, and where investors were ascribing little to no value. The freed up cash will be used to fuel buybacks, which should be significantly accretive to EPS with the stock trading at just 7x earnings. The next step for BGCP is likely to monetize its highly valuable Fenics electronic brokerage business – even if we apply just half the P/sales multiple of comps such as Tradeweb and MarketAccess, a sale could be worth more than the current $2.9 bn market cap of the stock and leave the remaining businesses (which generate the bulk of the company’s earnings) for free.
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