Value Investors Avoided Deutsche Bank and 2 Other European Financials

They were the least-held in the sector

Author's Avatar
Oct 07, 2016
Article's Main Image

Value gurus mostly exited Deutsche Bank (DB, Financial) before its stock tumbled this month on news it might have to pay a large fine related to the financial crisis. While many maintain positions in other European banks as fear weighs on stocks in the sector, they are avoiding two almost as much as Deutsche Bank: Banco Santander SA (SAN, Financial) and Lloyds Banking Group PLC (LYG, Financial).

As early as the second quarter, Deutsche Bank was the least held among portfolios tracked by GuruFocus. The bank represented only 0.03% of collective portfolios, with three holders and 57,139 shares owned among them. Investors who had positions as of second quarter-end were David Dreman (Trades, Portfolio) and John Burbank (Trades, Portfolio), in miniscule amounts. Jim Simons (Trades, Portfolio) of the algorithm-driven Renaissance Technologies, sold 95.8% of his stake.

Leading up to this month’s difficulties, Mario Gabelli (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) sold out in the first quarter 2015. David Dreman (Trades, Portfolio) exited by the first quarter and returned in the second, though with than 3,000 shares.

Deutsche Bank’s Sept. 15 announcement that it was negotiating with the U.S. Department of Justice to settle claims related to its involvement with residential mortgage-backed securities from 2005 to 2007. It announced provisions to cover litigation charges of 5.5 billion euros and 1.7 billion euros in contingent liability as of June 30.

Standard & Poor’s reported Friday it anticipates the final settlement number would exceed provisions, but would be materially smaller than the Department of Justice’s $14 billion opening negotiating offer. The ratings agency affirmed its BBB+/A-2 rating for the bank’s credit, with a negative outlook.

“We are affirming the ratings based on our view that Deutsche Bank has sufficient financial flexibility to absorb our assumed RMBS settlement at the current rating level,” S&P said.

“We remain of the view that Deutsche Bank's main challenge is the restructuring of its business model to achieve stronger earnings and capital, and we believe recent market volatility surrounding the bank may complicate the achievement of this goal.

Financially, Deutsche Bank has seen revenue decline at a rate of 7.4%, EBITDA at a rate of 23.2% and book value at a rate of 1.3% on average annually for the past five years. Its net interest income has been on a downward trend for the past four years, totaling $17.3 billion at the end of 2015, while its net interest margin declined for five consecutive years from 2009 to 2014 before rising to its highest in four years in 2015.

02May2017151806.png

Banco Santander SA (SAN, Financial)

Investors have also shown little enthusiasm for Spain’s Banco Santander SA. Among portfolios, it represents a mere 0.05% of shares held. Four tracked investors have positions, of 1,282,919 shares collectively.

Ken Fisher (Trades, Portfolio) has the largest position, Jim Simons (Trades, Portfolio) started a new one and Murray Stahl (Trades, Portfolio) increased his by 47.48% in the second quarter. David Dreman (Trades, Portfolio) reduced his holding by 47.85%.

Fewer investors sold the stock. In the past year, only Ruane Cunniff (Trades, Portfolio) shed their position.

In the past five years, Banco Santander’s revenue has declined at a rate of rate of 10.2%, EBITDA at 7.7%, EPS at 11.8% and book value at 1.3%. Its shares are down 25% in the past year.

02May2017151806.png

Lloyds Banking Group PLC (LYG, Financial)

Third, gurus’ portfolios had a mere 0.8% weight of Lloyds Banking Group PLC, almost half the portion of the next most-held bank, Barclays PLC (BCS, Financial), at 1.52%.

Five have positions, with a collective 95,134,086 shares. In the second quarter, NWQ Managers (Trades, Portfolio) started a position, David Dreman (Trades, Portfolio) increased his by 74.5% and Jim Simons (Trades, Portfolio) by 45.9%. The largest position holder, Ken Fisher (Trades, Portfolio), and Sarah Ketterer (Trades, Portfolio) each trimmed their position by less than a percent. No gurus sold out a position in Barclays in the past year ending in the second quarter, except David Dreman (Trades, Portfolio), who reinitiated a position in the following quarter.

Lloyd’s bank revenue has fallen at a rate of 9.4%, EBITDA at a rate of 24.4% and operating income at a rate of 35.7% on average annually over the past five years. Its shares are down 44% over the past year.

02May2017151807.png

See more least-held European banks at this screener. Start a free 7-day trial of Premium Membership to GuruFocus.