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Investing in European Banks

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Investing in European Banks

How can you make EUR1,000,000 from EUR40,000? Ingeborg Mootz is an "oldie trader", who discovered stock markets at the age 75. She began with a 40,000 DM deposit, and turned this amount into 1,000,000.

She preferred European banks for her financial operations - we'll also be paying attention to them today.

Stocks of European banks fall

Some of the problems that arose from the US mortgage crisis "spilled" over to European economies. The European Central Bank began to reduce its interest rate from 4.25% down to 1%.

But it wasn't enough. The ECB eased the rate until it was zero in 2015. This low interest rate made it difficult to make profits for banks and investors began to exit the sector.

Take a look at the chart of Deutsche Bank AG (NYSE DB): Since 2007, it has lost 95%.

Deutsche Bank chart
Deutsche Bank chart

It is similar to the losses at TAL Education Group (NYSE TAL) which, along with other representatives from the Chinese online education sector took a huge hit from the new regulations of government in the sphere education.

TAL Education Group chart
TAL Education Group chart

Inflation causes the ECB's to raise the rate

The situation on the European market is changing right now. Inflation reached 5.1% for the first-time in 30 years and prompted the ECB to raise its rate. This will have a positive effect on the income of financial institutions.

Inflation in Euro Area
Inflation in Euro Area

On 3 February, the ECB made its latest rate decision. It remained at 0.00%. Christine Lagarde, ECB Governor, stated recently that she was not so sure about a rate increase in 2022.

It was believed that it was a sign in favor of tightening monetary policy. The DAX (GER40), which was a gauge of market sentiment, plummeted and the 10-year yield hit the positive zone for the first time since 2019 We should be paying attention to the European banking sector.

German 10-year bond yield chart
German 10-year bond yield chart

The banks have accumulated a lot of financial reserves

Banks were prepared for the worst by accumulating reserves and making preparations during the pandemic. The regulator also imposed a moratorium upon dividend and bonus payouts and increased requirements for borrowers to decrease the number of originated loans.

The pandemic was more successful than anticipated in terms of financing. The pandemic didn't cause financial institutions to collapse, despite the fact that there were a few problem loans. Banks eventually accumulated a lot of financial reserves. Investors now hope this money will be used to pay dividends and to repurchase stock.

In turn, the regulator lifted a moratorium on borrowers and reduced requirements for them - this will allow financial institutions to make more loans and increase their revenue.

It is worth paying attention to European banks:

  • ING Group
  • Deutsche Bank
  • UBS Group

ING Group

ING Group N.V. (NYSE ING) is the largest Dutch banking group. Its key markets include the Netherlands, Belgium and Luxembourg. This group is ranked among the 30 largest banks in terms of originated mortgage assets.

Interest earnings from existing loans make up the bank's underlying profits. Q4 2021 reported a 4.5% increase in revenue, reaching $5.28 trillion. The interest earnings increased 17% while the return on equity was 9.2%.

Refinancing rates will increase, which will have a positive effect on the financial institution’s revenue. Investors will be happy with its quarterly reports through 2022.

American banks' stocks are trading at all-time highs. This is different from European banks. The ING Group stock trades 55% lower than its highs, and as a consequence, has a potential growth rate of $34 per share.

ING Group chart
ING Group chart

Deutsche Bank

Deutsche Bank AG (NYSE DB) is Europe's oldest bank, founded in Berlin in 1870. It is one of the 30 largest banks in the world and has branches in 58 countries.

Deutsche Bank published its fourth quarter financial statement for 2021 on 27 January. The net profit reached EUR315million - 160% more than the 2020 period. The highest annual income in the past 10 years was EUR25.4 billion.

The stock gained over 200% since March 2020. The stock could have "run out of gas", but we didn't notice it until too late. The weekly chart shows that we are at the beginning of our path. This is an analogy to Bank of America Corporation (NYSE BAC).

The triggers for the decline in shares of Deutsche Bank and Bank of America are similar, but the companies are regulated differently and operate in different countries so their recovery paths are different.

American companies develop faster. While the US Fed has announced several rate increases in 2022, the ECB only offers hints. The reason that stocks of European banks are recovering slower than their American counterparts is because of this.

We can see that the Bank of America stock is trading close to its all-time high. However, it was at $2.12 in 2009. The stock has risen by 2,185% since then.

Deutsche Bank and Bank of America charts

Deutsche Bank shares plunged to $20 after the mortgage crisis. Instead of returning to their highs, they continued to fall and fell to $5. They are only now starting to recover. The stock must rise by 738% to reach its peak. It's excellent growth potential.

UBS Group

UBS Group AG (NYSE : UBS) is a well-respected Swiss bank that manages assets for corporate and retail clients. The bank currently manages the most private wealth in the entire world.

UBS is considered to be one of the world's most powerful financial institutions. It is the third-largest European bank, as of 2021. It has half of the world's billionaires as clients.

The bank announced on 24 January that its fourth quarter 2021 income was $8.73 Billion. This represents a 7.5% increase compared to the same period in 2020 and 3% more than the amount forecasted by financial analysts.

The bank's forecast shows that the bank's management expects further growth in income. They also announce an increase in funds to be used for stock repurchases.

UBS stock trades at both the New York Stock Exchange and Swiss Stock Exchanges. It has been trading at the NYSE since 2014. We will analyse a SWX chart.

UBS was also affected by the US mortgage crisis, and its shares fell 90%. The stock has been trading at $20 resistance for 13 years, but it has only recovered 14% in the thirteen years that have passed since then.

The possibility exists that UBS shares could revert to their highs if the ECB raises the rate and the ranking sectors "revives", which would mean a potential growth of more than 300%.

UBS Group chart
UBS Group chart


Warren Buffett bought shares in American banks early in 2021. They are currently trading at all-time highs. European banks are still in shadow.

More rumours are circulating that American stocks may be "overbought", and it is high time to look at other markets. A good alternative is the European banking sector. It is just at the beginning of its recovery. The ECB's tightening of its monetary policy will be a great catalyst for the expansion of the mentioned segment.

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