Wednesday 10 April 2013

Analysis of Commerzbank

The second largest bank in Germany

Company: Commerzbank

Business: Classical banking as well as a part of investment banking. The investment part went very bad in 2008/2009 upon which they decided to try to go back to the more classical banking.

Active: Europe but the main focus is Germany where it is the second largest bank.

P/E: 1156.2

The stock price is for the closing day on 5/4-13.

I have in this case decided to make two tables. The first one is with the real values of Commerzbank from last year. It does indeed look very bad the second table is showing a feasible revenue for the second largest bank in Germany and what the table would then look like. But the revenue assumption is very weakly made due to two reasons. I looked at what they were earning before the crisis but back then they were having a large investment part that at least by the look of it was generating money. Secondly they did then not have the Dresdner bank part which means that they had even less bank customers and were back then not the second largest bank in Germany which they are today.
contrarian values of P/E, P/B as well as dividends

What we see here is an extremely high P/E value which comes from the very poor earnings of only 6 M euro. What we see is that they have a high book value however with banks one does not really know. One year ago they had a book value of slightly over 5 € per share and now it is down by over 10% and the question is if that is enough or not. I doubt it but even if we would knock of an additional 30% of the book value we would still be in a favourable situation with a book value of 3 €/share against a stock price of 1.19 per share.

What we also see is that they have significantly decreased their revenue in the last five years going from 21 billion to 15 billion which is also reflected in the stock price but in my opinion the market has over-reacted due to the crisis, the failed expansion, the rescue from the German government. The story has still not ended.

In this table we assumed a potential earning of 1.4 billion €. That is much less then what they made before the crisis and it around 25% of what Deutsche bank is earning per year. I also decreased the book value by further 30% from 26 billion to 18 billion.

What we see here is that the P/E value has become more reasonable and the stock looks very cheap with its P/E of 5. The price/book has increased due to the changes also there which leads to that the company according to Grahams formula is a strong buy. As with every bank the debt is large and should be compared with other banks. I can already say that it is similar to for instance Deutsche Bank. I added a 5% growth for the future which is only inflation + 3% additional growth and that then leads to according to Lynch and Graham a P/E value of 16-18 for the stock which it is far from and also here indicates a buy. In this manipulated table above I also added potential future dividends but I do not expect that to happen within the next 3 years.

Conclusion: The Commerzbank stock is a buy today because it is so hated due to so many different reasons. One must expect to hold it for several years though.


Till S. said...

Just a thought to banking: It won't be the same as 2007 in the next 30 years. In my opinion, there was a fundamental shift in dealing with banks and financial institutions. Before 2007 the trend was deregulation and complex products. Today it is regulation and simple products. This means banks have higher cost and lower return as before 2007. This is for all banks. Now you have to think which banks will survive and earn money in this market environment. I can't say, but I would not trust Mr. Blessing in earning significant amounts of money. Probably the Commerzbank will be there in ten years, but how much money you got through your investment. I think not a lot.

Fredrik von Oberhausen said...

Dear Till,

in Europe the banks are still struggling and are valued very cheap. In the US the banks are making record earnings in Q1 (ex. Goldman Sachs had a profit of $694M) and they are still also valued low.

I agree that regulations will change things temporarily but I doubt it will have a strong impact on the earnings in the long run. They will create new financial "products" and get profits. Things will change and still stay the same.

Specifically for Commerzbank then yes they might one day be close to going insolvent but then with their large customer base and infrastructure in Germany they will merge with another bank. In that merger I would expect to get the bookvalue of 4€ per share out either as cash or as shares in the merged bank either way I should have a gain.

With my style of investing I look very little into the future which might become my achilles' heel.

Anonymous said...

I think Commerzbank is very cheap. They will return stronger from this crise. I bought them at 6,8€ and so far so good, i am waiting for further results but i believe they will do good. From the moment their EPS starts to growth the sky will be the limite, there is a lot money to do. The only problem is the timing to enter this stock. Do you know how much exposure do they have to the southern countries?

Fredrik von Oberhausen said...

I fully agree that they are cheap and they will come out on top in a couple of years. 6.8 was a very good price i got them at around 14 and even that i consider cheap.

Directly after they had taken over Dresden bank from Allianz they got massive debts in the south of Europe but since then they have systematically decreased their exposure and today i would not consider it to be any danger due to two reasons. Exposure is so much less and secondly because southern europe is doing much better again.

Commerzbank will start to do well when ECB starts to push up the interest rate again. They are today mainly a classical bank and the second largest in Germany. My guess is within the next 3 years...

But you really you got them at a good price! Well done!