With the market still down significantly this year, there are plenty of stocks trading at a discount. One area that has seemingly been overlooked is the European banking sector, which has long struggled but now has several companies trading at huge bargains, despite having significantly improved their operations.
These stocks do not come without risk, as Europe faces an energy crisis and high inflation, creating further potential macro issues down the line, which can certainly impact banks negatively. There's also the chance of a value trap, as investors have seemingly turned their back on a lot of these stocks.
But over the long term, water tends to find its level. If these banks keep trending in the direction that they are, I think there is good money to be made. Here are three European bank stocks that investors can buy for less than 50 cents on the dollar.
1. Barclays
Barclays (BCS 1.52%) is a nearly $1.9 trillion asset bank based in the U.K. that also operates an international consumer banking business including in the U.S. Over the last decade, Barclays has not performed well, generating a return on equity that has typically been less than 4% -- which is pitiful, especially for a bank with so much scale.
But management has been investing in its corporate and investment banking division, and has been gaining share in global markets. Barclays has also been making good progress in its cards and payments business, which is starting to pay off as well. Additionally, the Bank of England has raised interest rates to the highest level seen in 27 years to bring down surging inflation. A 0.25% hike in the Bank of England's key benchmark interest rate would add 525 million of pounds of revenue to Barclays over the next three years, and the Bank of England has now jacked its benchmark interest rate to roughly 1.75%.
Barclays generated a 13% return on tangible equity (ROTE) in 2021, which has been bolstered by unique post-pandemic conditions and some non-recurring items, but management thinks the bank can generate a sustainable 10% ROTE in the medium term. Barclays also has plenty of capital and an annual dividend yield of more than 4%. A 10% ROTE for a bank of this size is still far below what the top U.S. banks are generating, but Barclays is trading at less than 43% of its tangible book value, or net worth, which leaves plenty of potential upside long-term.
2. Deutsche Bank
Germany's largest financial institution, Deutsche Bank (DB 1.48%), has been marred by regulatory issues over the years, and it seems like there is still a lot of work to do on that front. But the bank has seemingly been successful in overhauling its core banking operations. In 2019, Deutsche Bank announced a sweeping transformation plan that included exiting its equity sales and trading business, returning five billion euros to shareholders beginning this year, cutting costs by six billion euros, and investing 13 billion euros in technology.
The bank has achieved many of these goals, and is now in the final year of the transformation. In the first half of 2022, Deutsche Bank generated an 8% ROTE, despite the volatile environment. It has also now posted eight straight quarters of profit. The bank has also reduced its cost-to-income ratio (expenses divided by revenue) by 14% in just two years. The ratio was still high at 73% for the first half of the year, but the plan is to continue to bring the ratio down significantly.
Deutsche Bank is also going to benefit a lot from rising interest rates, generating more than $2 billion in additional revenue by 2025. Management is also projecting a 10% ROTE by 2025 as well. Deutsche Bank trades at a mere 27% of its tangible book value, which seems far too cheap for the kind of results the bank has and is planning to achieve.
3. Societe Generale
The large French bank Societe Generale (SCGLY 1.14%) has also done a good amount of restructuring in recent years, and continues to cut costs. The bank said last year that it plans to eliminate another 3,700 jobs between 2023 and 2025 as it continues to consolidate its retail banking operations.
The progress does seem to be paying off. Societe Generale lowered its cost-to-income ratio to 56% in the first quarter of this year, and just below 62% in the second quarter. The bank generated a ROTE of 6% in Q1, and ROTE probably would have been even better in Q2 had it not been for the 3.3 billion euro charge the bank took as a result of selling its Russian banking operations, which resulted in a loss for the quarter.
But Societe Generale is expecting to generate a 10% ROTE by 2025, and has told shareholders that it plans to use as much as 40% of its underlying profits to buy back stock, which will be incredibly beneficial with the bank trading at less than 29% of its tangible book value. Societe Generale also has a massive annual dividend yield of close to 8%.
