Europe’s credit crisis is punishing Spanish and U.K. companies as if they were Greek, luring investors with valuations that suggest risk is the same everywhere in the region.
The price-earnings ratio of London-based HSBC Holdings Plc, Europe’s biggest bank by market value, slipped below Greece’s EFG Eurobank Ergasias SA last week, according to data compiled by Bloomberg. Spain’s Banco Santander SA traded at 8 times projected profit, the lowest relative to Athens-based Piraeus Bank SA in more than three years. The Stoxx Europe 600 Index fell 4.6 percent last week, heading toward its biggest monthly retreat since February 2009.
“I have had Greek stocks in the past but at the moment there are much better things to do elsewhere,” said Katherine Blunden at HSBC Private Bank in Paris, whose $346 million Europe Value fund is outperforming the Stoxx 600 for an eighth year. “I have Spanish or Italian positions and I keep them because they are attractive. I’m very definitely keeping Santander and may even reinforce it as its valuation improves.”
European equities are the cheapest in a year after rising concerns about sovereign defaults wiped out about $2 trillion from the region’s market value this month. While the Athens Stock Exchange General Index has fallen 27 percent in 2010, shares in countries with less default risk are trading at bigger discounts to their earnings, according to data compiled by Bloomberg.
The Stoxx 600 rose 0.4 percent to 238.02 today, breaking a three-day losing streak.
HSBC, which has $2.4 trillion in assets and branches in 88 countries, has fallen 11 percent since Dec. 31, giving it an earnings multiple using 2010 forecasts of 13.2, Bloomberg data show. Santander, Spain’s largest bank, has slid 26 percent this year. The Santander, Spain-based lender, which employs more than half of its 171,000 staff in Latin America, will post a 3.1 percent rise in net income to 9.2 billion euros ($11.6 billion) in 2010, according to the average estimate in a Bloomberg survey of 19 analysts.
Intesa Sanpaolo SpA, Italy’s second-biggest bank, costs 9.6 times projected profits. Milan-based Intesa forecast higher profit for 2010 on May 14 after posting better-than-estimated net income of 688 million euros for the first quarter.
Eurobank, trading at 13.3 times predicted earnings, saw its valuation climb above HSBC’s on May 19 for the first time since January 2008. The Athens-based lender has a market capitalization that is one-fiftieth of HSBC’s and generates about two-thirds of its revenue in Greece, with the rest coming from former communist countries in eastern Europe. Analysts have cut their estimates for Eurobank and now say profit may slump 23 percent to 236 million euros from a year earlier instead of increasing 51 percent as they predicted as recently as January, according to data compiled by Bloomberg.
Eurobank commanded a premium even after Greek equities tumbled the most this year among 93 countries tracked by Bloomberg except for Venezuela, on concern the nation won’t be able to rein in its budget deficit, which touched 13.6 percent of gross domestic product in 2009. The slump has left the ASE Index valued at 8.6 times its members’ estimated 2010 profits, compared with almost 13 times for the MSCI World Index, Bloomberg data show.
As contagion from the Greek crisis has spread around Europe, valuations for markets outside of Greece have become compressed. The U.K.’s FTSE 100 Index is valued at 10.2 times this year’s estimated earnings, down from 12.7 times in January, the data show. The ASE now trades at just a 6.3 percent discount to Spain’s benchmark IBEX 35, down from 25 percent in January.
‘Cheap as Greece’
“Other markets are as cheap as Greece, probably with more stability,” said Dietmar Schmitt at SAM Capital Partners Ltd., a London-based manager whose long-short European equity hedge fund made money in 16 of the last 18 months. “In Spain, at least you know the exchange is going to open if the market collapses.”
Greek workers staged their fourth general strike last week with thousands marching in Athens to protest spending cuts that Prime Minister George Papandreou must push through to qualify for international aid. Three people were killed on May 5 after demonstrators set fire to a bank in the Greek capital. Greece’s economy will shrink 4 percent this year, according to government and EU estimates.
Spain’s government approved the first public wage reductions last week since returning to democracy in 1978 and cut its forecast for economic growth for next year to 1.3 percent as it seeks to tame the euro region’s third-largest budget deficit.
“My current position is out of Greece and Portugal, but we are still in the large international banks in Spain and Italy on the basis that they have diversification into overseas markets,” said Mark Bon, who helps oversee about $750 million at Canada Life Ltd. in London and recently added to holdings of Santander. “Some of the valuations are attractive relative to other banks. Greece should be cheaper than the international financials.”
Credit-default swaps on National Bank of Greece SA, which pay holders in the event the issuer fails to pay its debt, show a 36 percent possibility of default by the largest Greek bank, according to prices from CMA DataVision. Contracts on Santander and HSBC suggest 15 percent and 8.6 percent chances, respectively.
“We’re getting to a situation where now is a very good time for investors to be looking around, not necessary buying the region, but certainly looking at companies and asking, ‘Is this mispriced?’” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which oversees about $221 billion. “Investors are still looking for growth opportunities.”
Standard Life is bullish on Lisbon-based Jeronimo Martins SGPS SA, Portugal’s biggest retailer, Bagsvaerd, Denmark-based Novo Nordisk A/S, and Munich-based MAN SE, Europe’s third-biggest truckmaker, Milligan said. Jeronimo Martins has an estimated P/E of 17.3, compared with 20.3 for Novo Nordisk and 21.3 for MAN.
Coca-Cola Hellenic Bottling Co., the world’s second-largest supplier of Coke beverages and Greece’s biggest company by market value, trades at 13.8 times estimated earnings, the highest level relative to Group Danone SA’s 15.7 and Nestle SA’s 15.8 since the second quarter of 2008. Paris-based Danone bottles Evian and Volvic water while Nestle, in Vevey, Switzerland, owns the Perrier and San Pellegrino water brands.
“The companies in Germany, France and Switzerland, those are the places where the sovereign situation is not as bad, but the overall selloff is making those places attractive,” said Wasif Latif, vice president of equity investments at USAA Investment Management Co., which oversees $45 billion in San Antonio. “This isn’t the time to back up the truck, but if the weakness persists or gets worse, investors need to start taking a look at the high quality, fundamentally sound companies and start adding because they can probably get some bargains.”
Europe’s banks remain too exposed to the worsening debt crisis, which makes spotting value harder, said Colin Mclean, who helps manage 650 million pounds ($936 million) at SVM Asset Management Ltd. in Edinburgh.
“The problem with banks is the same as in 2008, that it’s very difficult to get visibility in the underlying metrics,” Mclean said. “It is quite difficult to ascertain what true value is. We don’t hold long positions in either Spain or Greece. We still have remaining short positions.” SVM is underweight European banks, meaning the stocks represent a smaller slice of assets than their weighting in benchmark indexes.
Credit Suisse Group AG’s London-based strategist Andrew Garthwaite says southern European lenders should trade at 0.5 times their tangible book value, a measure of what the company would be worth in liquidation, as the countries may experience falling consumer prices.
Alpha Bank AE and Piraeus Bank, based in Athens, trade at an average of 0.85 times tangible book, more than double the ratio for Edinburgh-based Royal Bank of Scotland Group Plc, according to Bloomberg data. The valuation is in line with that of Barclays Plc, the London-based bank that analysts estimate will report 2010 net income of 4 billion pounds, and 30 percent more expensive Paris-based Credit Agricole SA, France’s biggest bank by branches.
With Europe’s Stoxx 600 closing last week at its lowest level in more than six months, valuations are becoming increasingly attractive for Hans-Peter Schupp, manager of Fidecum AG’s $77 million Contrarian Value Euroland fund near Frankfurt, which has outperformed the market this year.
“Spanish companies are starting to pop up in our screens,” said Schupp, who looks for the cheapest shares in Europe’s equity markets and already owns Credit Agricole. “We don’t find opportunities in Greece.”