In February 2011, I flagged U.S. thrift conversions (mutually owned thrifts that convert to publicly traded companies) as an intriguing opportunity; since then, the basket I highlighted has performed honorably (see below). Today, I'm presenting an opportunity set that is similar, but with the potential for higher upside. These stocks pay very healthy yields and some of them could produce substantial capital gains. Unfortunately, few readers will be able to take advantage of them.
Before I describe this new idea, I want to detail the returns of the thrift conversion basket:
|Thrift conversion basket
|KBW Regional Banking Index (INDEX: ^KRX )
*Based on closing prices on April 14, 2011, and July 23, 2012. Source: Yahoo! Finance, Fool analyst Anders Bylund's calculations.
I came across today's idea in a recent Barron's interview with Paul Isaacs, a nephew of Walter Schloss.
Back to the farm, boys
In 1894, France passed a law authorizing the creation of Credit Agricole's local banks, which were mutually owned by farm union members. Less than 30 years later, in 1920, the government created an entity that was later renamed Caisse Nationale de Credit Agricole (CNCA) to federate Credit Agricole regional banks. Finally, the CNCA was privatized in 1988, with the regional banks taking up 90% of the share capital and the remaining 10% reserved to the staff.
Today, the 39 regional banks still retain majority ownership of Credit Agricole S.A. (OTC: CRARY.PK), which, in turn, owns 25% of the share capital of each of the regional banks (with the exception of Corsica's). The principal owners of the regional banks are local banks, but some of them are also quoted on the Paris Stock Exchange; I found 13 via S&P Capital IQ. The group is eye-poppingly cheap on traditional metrics, with not one member trading for more than a third of tangible book value (an accounting measure of equity value that excludes the value imputed to acquisitions) or five times trailing earnings. Conversely, dividend yields range from 7.1% to 9.6%.
Less than two times trailing earnings!
Take Credit Agricole Sud Rhone Alpes (PAR: CRSU.PA), for example, which operates over three French "departments" (administrative regions). Naturally, it is the leading farming bank over its territory, but one in three homes is also a customer. Its "certificates" trade at less than one-fifth of tangible book value and less than two times trailing normalized earnings, with a dividend yield of 8.3%. This is a bank that has been profitable every year since the onset of the credit crisis.
The capital structure is very conservative -- average assets in 2011 were less than 10 times average common equity and deposits account for almost all the bank's liabilities (i.e., it doesn't need to rely on short-term funding). A word on the dividend: It was never reduced, much less suspended during the credit crisis. Meanwhile, at 10.2% in 2011, the payout ratio -- the percentage of profits the bank pays out to shareholders in dividends -- is anything but exorbitant. A dividend yield in excess of 8% will buy a fair amount of patience from investors who can get reasonably comfortable that the bank's shares will ultimately command less depressed multiples.
The cheapest megabank in the world?
The shares of Credit Agricole regional banks are illiquid and U.S. investors are subject to currency risk (and that risk is very real when it comes to the USD-euro exchange rate). More accessible to U.S. investors and more liquid are the shares of the federating parent entity, Credit Agricole S.A., which trade on the pink sheets. If you think U.S. commercial banking giants Bank of America (NYSE: BAC ) or Citigroup (NYSE: C ) are cheap at 0.55 and 0.49 times tangible book value, respectively, Credit Agricole S.A. is nearly half again as cheap on the same metric, with a multiple of 0.29 (it trades on a higher earnings multiple, however). Nevertheless, although I am mentioning it here, I don't find it as attractive as the regional banks.
Incidentally, measured on total assets, Credit Agricole is roughly the same size as B of A and Citi; the French government (and international regulators) certainly regards it as "too big to fail," which doesn't mean it wouldn't be willing to inflict losses on equity owners, naturally.
This idea might be for you if...
If you're an experienced stock picker, you're able to buy Paris shares directly, and you have the time to do some due diligence, Credit Agricole regional banks look like an interesting area in which to forage. Special situations are doubly attractive in the context of a stock market that looks likely to remain range-bound over an extended period of time. Finally, you'll need a well-honed tolerance to volatility, for when it comes to European banks, shares that look cheap -- and even those that are legitimately cheap -- could certainly get cheaper yet.
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