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After Earnings and the Selloff, Are Eurozone Banks Undervalued?

France's BNP Paribas and Spain's Banco Santander are among the cheapest banks in the eurozone, according to Morningstar analysts

Sara Silano 14 August, 2024 | 11:03AM
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Eurozone banks had a solid half-year earnings season, and some raised their full-year forecasts. But the selloff in the markets in early August also affected valuations in this sector.

Below we present our analysts' views after the second-quarter earnings report, and the sell-off. Banking stocks are ranked by capitalisation (data as of August 8, 2024).

Morningstar Key Metrics for Eurozone Banks

BNP Paribas (BNP)

Analyst: Johann Scholtz, CFA

The French bank released its second-quarter earnings report on July 24.

BNP Paribas reported solid second-quarter 2024 results, somewhat ahead of company-compiled consensus expectations. As expected, the corporate and investment banking operation stood out, growing revenue by 12% year on year with a strong equity trading performance.

After recording a net income of EUR 6.5 billion for the first half of 2024, BNP remains on track to achieve its guidance of net income above the EUR 11 billion it booked for 2023. We maintain our EUR 85/share fair value estimate. BNP remains one of our top picks in the European banking sector, trading at a 26% discount to our fair value estimate. BNP trades at a 40% discount to the European banking sector's average price/tangible book ratio, offering a juicy 7.5% dividend yield.

Banco Santander (SAN)

Analyst: Johann Scholtz, CFA

The Spanish bank released its second-quarter earnings report on July 24

Banco Santander reported an attributable profit of EUR 3.2 billion for the second quarter, 20% higher than the EUR 2.7 billion it reported a year earlier and in line with the consensus expectations of analysts polled by the bank. However, a EUR 687 million (noncash) hyperinflation adjustment for the Argentinian operations hurt results. Santander increased its 2024 guidance slightly and now expects upper-single-digit revenue growth for 2024 compared with midsingle digits previously. We will incorporate the results in our model and may change our EUR 5.80 fair value estimate.

The bank's operations in Brazil and Spain were the standout performers, while its UK business struggled. Despite loan-loss provisions being far below midcycle levels, the UK operation continued to drag overall profitability down, generating an 11% return on tangible equity for the quarter—the group booked a 15% consolidated return on tangible equity.

Intesa Sanpaolo (ISP)

Analyst: Johann Scholtz, CFA

The Italian bank released its second-quarter earnings report on July 30.

Intesa Sanpaolo continues to deliver exceptional results, with the second quarter of 2024 contributing to its best six months in history. Net revenue grew by 8% in the second quarter compared with the same period last year, with net income increasing by 12%. Intesa will, however, face a more challenging base from the next quarter, with net interest margin expansion having peaked. The bank kept a tight lid on costs, resulting in a slight decline in operating expenses and a lower cost/income ratio of 38%. Credit quality remains sound, and Intesa recorded its lowest-ever nonperforming loan ratio of 1%.

It generated substantial excess capital, which we expect the firm to distribute to shareholders through dividends and share buybacks over time. It expects the total payout to be somewhat higher than in 2023. Intesa is well positioned for the changing economic cycle and is on track to achieve its 2025 targets. We maintain our fair value estimate of EUR 3.50 per share.

UniCredit (UCG)

Analyst: Johann Scholtz, CFA

The Italian bank released its second-quarter earnings report on July 24.

UniCredit achieved another quarter of record results, extending its three-and-a-half-year growth streak. With one of the industry's lowest cost/income ratios, UniCredit remains highly profitable, even with material excess capital.

With net interest margin expansion clearly a thing of the past, attention will shift to other levers UniCredit can pull. We are therefore impressed by the robust fee income growth and sound cost containment evident in the second quarter. Excess capital is a nice problem to have, but there will be more demands from the market that UniCredit speeds up the deployment or return of excess capital. We have slightly raised our fair value estimate to EUR 35 from EUR 33 per share.

Banco Bilbao Vizcaya Argentaria (BBVA)

Analyst: Johann Scholtz, CFA

The Spanish bank released its second-quarter earnings report on July 31.

Banco Bilbao Vizcaya Argentaria reported an excellent second quarter of 2024 with net attributable profit reaching nearly EUR 2.8 billion, up 29% quarter over quarter and 37% year over year in constant euros and also 14% ahead of the consensus estimate of analysts polled by the bank. However, the earnings beat was primarily driven by exchange-rate hedges. Operating results were in line with expectations.

BBVA's Spanish operation is performing better than expected, and management has slightly increased revenue guidance. BBVA is confident it can replicate its first-half performance in the second half of 2024, implying a net profit of nearly EUR 10 billion. We continue to view BBVA as undervalued. We were puzzled by the market's adverse reaction to the results, with the shares trading down nearly 5% after earnings.

ING Group (INGA)

Analyst: Johann Scholtz, CFA

The Dutch bank released its second-quarter earnings report on August 1.

ING booked a net profit of EUR 1.8 billion for the second quarter of 2024, nearly 10% ahead of the company-compiled consensus estimate. Earnings came in 24% lower than a year earlier, but operating trends aligned with what we saw in the first quarter. ING looks well set to meet our expectations and its guidance for the full year.

The one blemish in the results was that ING needed to release some of its rainy day "overlay" provisions to smooth out the higher provisions taken in the quarter against nonperforming loans. The reported return on tangible equity was an already impressive 14%. Still, if one excluded ING's surplus capital, profitability would have been closer to 18%; therefore, we feel very comfortable with our midcycle return on tangible equity estimate of 13%. We keep our EUR 20/share fair value estimate.

Deutsche Bank (DBK)

Analyst: Niklas Kammer, CFA

The German bank released its second-quarter earnings report on July 24.

Deutsche Bank reported second-quarter results that were heavily affected by EUR 1.6 billion in litigation charges. Related to the Postbank takeover litigation, the bank booked a EUR 1.3 billion provision, which it believes should be sufficient to cover all related claims. The litigation provision was already announced on April 26 after a hearing in the Higher Regional Court in Germany. Outside of this sizable one-off, the bank had a decent quarter, and we maintain our EUR 13 per share fair value estimate. Our no-moat rating is unchaged.

Net revenue increased to EUR 7.6 billion, up 2% compared with last year, although it was down 2% on a sequential basis. The investment bank saw revenue decline 15% versus the first quarter this year, driven by weaker debt capital markets and a smaller investment banking revenue pool. Asset management stood out positively, with a 7% increase in revenue. Higher asset prices more than offset net outflows in the quarter. Operating expenses were flat sequentially. Negatively, Deutsche Bank raised its loan loss guidance from between 25 and 30 basis points to above 30 basis points, citing its commercial real estate exposures in Germany and the United States.

ABN AMRO Bank (ABN)

Analyst: Johann Scholtz, CFA

The Dutch bank released its second-quarter earnings report on August 7.

ABN Amro reported roughly stable year-over-year and quarter-over-quarter earnings for the second quarter, comfortably ahead of the company-compiled consensus. Releases from loan-loss provisions were the main driver of the earnings beat, which we don’t think the company can maintain. ABN raised its net interest income guidance for fiscal 2024 slightly to EUR 6.4 billion from EUR 6.3 billion, with its cost guidance unchanged at EUR 5.3 billion.

ABN remains one of the European banks with the greatest gearing to the interest-rate cycle. Still, fee income has steadily grown, and recent acquisitions support further revenue diversification, placing it in a better position for future lower interest rates. Although CEO Robert Swaak's recently announced departure was unexpected, we do not expect a change in strategy. We updated our model to incorporate new NII guidance, labor agreement changes, and restructuring provisions. Still, the net impact was negligible, and we kept our fair value estimate unchanged at EUR 21/share.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ABN AMRO Bank NV NLDR14.74 EUR-0.77Rating
Banco Bilbao Vizcaya Argentaria SA9.17 EUR0.00Rating
Banco Santander SA4.37 EUR0.00Rating
BNP Paribas Act. Cat.A56.92 EUR-2.23Rating
Deutsche Bank AG15.55 EUR-2.86Rating
ING Groep NV14.65 EUR-1.16Rating
Intesa Sanpaolo3.63 EUR-0.93Rating
UniCredit SpA38.09 EUR-1.87Rating

About Author

Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy

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