Deutsche Bank's (DB) massive restructuring plan is pulling down the stock of peer banks in Europe, providing an interesting entry point for contrarian investors.
Shares of Deutsche Bank barreled downwards by more than 6% shortly before the close Monday and has sparked a trend across European contemporaries like Commerzbank (CRZBY) , BNP Paribas (BNPQY) , and to a lesser extent HSBC (HSBC) and Barclays (BCS) to follow suit.
"Deutsche Bank's announcement over the weekend clears the path for all European banks to shed some of their weaker businesses that were often being left as parasites out of national pride or arrogance," Peter Tchir, Head of Macro Strategy at Academy Securities wrote in his Real Money column.
But it could benefit the peers further if they can pick up some of the better businesses Deutsche Bank needs to offload and can access some of the human capital the bank is slated to lay off.
"We expect peers to be better placed to weather any deterioration in the macro political environment and to benefit from business lost at" Deutsche Bank, RBC Capital Markets analyst Anke Reingen said, noting that the restructuring plan would lower the bank's common equity tier 1 ratio and that "there is a risk that it might have to raise capital."
For business lost, BNP has already scooped up the equities business in an agreement attached to the restructuring, offering an opportunity for expansion at France's largest bank. With the scale back in fixed income as well and massive staff cuts to come, the opportunities should extend beyond just that agreement.
Reingen added that a lower CET 1 ratio should provide some relief for some of the bank's EU peers.
Further help could come from the European Central Bank at this point, compounding encouraging environmental factors for its peer group.
"Incoming European Central Bank President Christine Lagarde is likely to 'help' Europe with some form of quantitative easing (QE), but the real story here is that she has been brought in to help shape European policy more broadly," Tchir commented. "Look for Lagarde to turn the ECB into a champion of fiscal stimulus. It is what Europe needs from an economic and political standpoint. There is good near-term upside potential in European banks."
Overall, a leader perceived as more friendly succeeding one perceived as more irascible atop the ECB is likely the biggest factor for European banks.
To be sure, the question that comes into play is how much counter-party risk each bank will have in relation to Deutsche. While the bank has worked diligently to reduce its ties to other banks in line with the international banking regulations known as Basel standards, the headline risk remains a fear factor.
"Deutsche Bank is the next black swan in Europe" is how Real Money's Doug Kass puts it, describing its position late last year. Kass has said he expects the acceleration of big U.S. banks like Citigroup (C) , JPMorgan Chase & Co. (JPM) , Bank of America (BAC) , and Wells Fargo (WFC) to capitalize on the woes at Deutsche, rather than its European peers.
The expected opportunity in Europe could be especially tempered as Deutsche draws its focus into its familiar terra firma in continental Europe and trims or shutters many of more far afield forays.
In the end, the European banks provide investors with an opportunity in sight, but also with a great deal of risks, namely those built on uncertain political and economic expectations for the European continent and the remaining counter-party risks Deutsche Bank brings with it.
Yet, its rarely an opportune entry point when many are bullish on certain stocks, which is precisely why contrarians like Tchir are eyeing the action.
Among his top three reasons to buy European bank stocks, No. 1 reads: "Very few people do."
Citigroup and JPMorgan Chase are holdings in Jim Cramer's Action Alerts PLUS member club.
