Bank to the Future

 | Feb 21, 2014 | 3:00 PM EST
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As the Federal Reserve looks to roll back its stimulus and quantitative-easing programs, the rest of the world is still printing money, buying bonds and doing whatever it can to stimulate global growth. In fact, before the G-20 meeting in Sydney, Australia, this weekend, the International Monetary Fund released a report that warned advanced economies to avoid prematurely rolling back stimulus programs. European Central Bank President Mario Draghi recently reiterated that he is ready and willing to use some form of quantitative easing similar to the U.S. bond-buying program to get the eurozone economy going. Japan is expected to increase its stimulus programs to get its economy back to a reasonable level.

It appears that the rest for the world is about two years behind the U.S. in terms of aggressive policy action to stimulate economies and inflate asset values. Whether or not this works for stimulating economies and creating job is a debate we can have another time, but there is little question that stimulus programs do a wonderful job of inflating financial assets in general and the valuation of bank stocks in particular. Although the stocks of many global money centers have moved higher in price over the past couple of years, they trade at a large discount to book value.

If the rest of the world really is about two years behind the U.S., it might be instructive to look where big U.S. banks were two years ago. Bank of America (BAC) was trading at twice the market lows of the financial crisis but has since tacked on 70% or so of gains as the Fed pumped money into the banking system. Wells Fargo (WFC) shares have more than doubled but have gained an additional 80% or so in price in two years. JPMorgan Chase (JPM) had already doubled and has almost done so again, gaining more than 90% over the past two years. The wave of liquidity has done the same for shares of Citigroup (C) as that stock has almost doubled in value in the same period. At the time, all of these stocks had improved substantially but still traded below book value.

Many banks in Europe fit the same profile today. Royal Bank of Scotland (RBS) looks very much like the big U.S. banks did in 2012. The stock has doubled since the financial crisis but the shares are still fetching just 42% of tangible book value. The bank has been disposing of non-core assets and focusing its efforts on retail customers, small business and large companies. It is exiting many international businesses, like its U.S. and Asian investment-banking operations. The bank has already cut 25% of its work force since the depths of the crisis, and just announced it will be eliminating almost 30,000 additional jobs to help control costs. Continued stimulus programs and moderate economic recovery in the U.K. and Europe could easily push this stock up to at least book value over the next few years.

Crédit Agricole (CRARY), France's third-largest bank, has struggled in the weak European economy. The bank is a federation of French agricultural credit co-ops that own roughly 40 regional banks that, in turn, control insurance companies, corporate banks, investment banks, investment management, brokerage and international operations. It has 2,512 local banks and 39 regional banks as part of its banking group. It recently announced that it has turned the corner to profitability in 2013 and proposed its first dividend since 2010.

The bank's American Depositary Receipts have doubled over the past two years but still trade at just 40% of book value. The bank will be releasing a strategic plan next month and will outline steps to become the largest branch network in Europe by 2020. If it comes close to these lofty goals, the share price should be a lot higher than the current level over the next few years. Europe is still struggling to get its economy back on track. Unemployment is still very high in the southern nations of the Old World and even though we are seeing improvements, it is very much a case of three steps forward, two steps back. The ECB will continue to explore ways to use stimulus and monetary policies to push toward consistent growth, and that should be very good for banks in the region. Many of them are still very cheap and could offer outstanding returns over the next several years.



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