Friday 7 October 2016

Open question on banks

Due to that I have two German banks that have not only share price-wise  but also earnings-wise have performed among the worst of the German and European banks I started thinking about their book value. Both DB and Commerzbank are now trading around 0.2 to 0.3 in book value.

Most other companies would have started a massive share buy-back program but the banks do not. 

Why do they not do that? Losing too much leverage? Do not care about the shareholders? 


Jan said...

The equity position of a company is quite important as you know. This determines to what extend a company can survive losses, write-downs, harsh winters. Compared to other companies, banks have very little equity versus liabilities. Lot of new regulations now force them to add a larger portion of equity to the balance sheet.

If banks would buy back shares, they would basically decrease their equity! They would take cash, buy back shares and withdraw these shares. Result: lower cash on one side of the balance sheet, lower equity on the other side. Bad for the liquidity (cash) and bad for solvability. That is not a good idea at the moment, regulators will not allow it.

The book value per share of banks is so low, because the expectation of future profits are so low. Markets apparently thinks that the book value of banks will come down, dus to low profitability, losses etc.

The expectations are so negative, that it may be a contrarian buy. But....banks have the bad characteristic to boom and bust in cycles :-( So they might not be the best buy and hold stocks.

By the way: always enjoying your blog, have been a reader for many years now. Keep up the good work.

Fredrik von Oberhausen said...

Thanks for your comment Jan!

I thought they were contrarian when I bought them four years ago but little did I know... and that they would drop over 50% more I was not expecting.

Hmmm... I thought that maybe it would be possible to buy back shares without withdrawing them since that would mean that the shares would still be in the balance sheet. But I guess these are all just miserable shareholder thoughts...