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Bank Capital and Liquidity: How Much Is Enough?

European banks are reporting strong regulatory capital ratios, yet many are trading around half of tangible book value

Erin Davis 14 October, 2011 | 9:35AM

European banks are reporting strong regulatory capital ratios, yet many are trading around half of tangible book value, implying that markets think that heavy losses and/or dilutive capital raises lie ahead. We think that all European banks will face choppy profitability and volatile trading until a more complete solution to the euro problem is found, but that some banks are in a better position to weather the storm than others. For investors drooling over the discounts currently being offered on Euro banks, we take a look at which banks look like bargains, and which might be value traps, by measuring which banks have the sufficient tangible--not just regulatory--capital and adequate access to high-quality funding.

We find that Julius Baer (BAER), HSBC (HSBA), and Standard Chartered (STAN) pass all of our tests with flying colours--no surprise given that Baer is an overcapitalised, low-risk private bank, and HSBC and Standard Chartered are more emerging market banks than European banks. UBS (UBSN) is trailing closely behind, coming in only slightly above our preferred thresholds. However, with all four trading above tangible book value, we dig a little deeper for bargains and find that BNP Paribas (BNP), Lloyds Banking Group (LLOY), and Royal Bank of Scotland (RBS) offer reasonable capital cushions, acceptable funding profiles, and very attractive discounts. All seven of the banks mentioned here have manageable exposure to PIIGS sovereign debt.

The above is an excerpt from a Morningstar Institutional Research rerport.

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.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Standard Chartered PLC768.70 GBX0.52
About Author

Erin Davis  is a senior banking analyst for Morningstar.