BNP Paribas: Bank on Europe

09/19/2013 10:00 am EST

Focus: GLOBAL

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

It appears the beginnings of a European recovery have arrived. And one sector in particular appears primed for growth; indeed, if Europe's debt crisis were a car, its banks would be the engine, suggests Ian Wyatt, editor of the $100K Portfolio.

Right now, European banks are where US banks were four years ago. Many of them have been left for dead, dismissed by investors as risky bets on a shaky recovery. And that's exactly why I've been digging into European financial companies.

These banks are growth opportunities. It won't happen overnight. Europe's debt problems are even more deeply-rooted than America's were. The road to recovery will be a bumpy one. But as a long-term value investment, European banks have immense growth potential. And one bank in particular stands out.

Headquartered in Paris—with a second headquarters in London—BNP Paribas (BNP:FP) (LES:0HB5) was one of the few European banks to emerge from the continent's credit crisis relatively unscathed.

In 2008 and 2009, as global debt was spreading like wildfire, BNP Paribas posted a net profit of 8.8 billion euros. Last year the company turned a profit of 6.6 billion euros ($8.7 billion)—more than four of the six largest US banks.

Unlike most European banks, BNP Paribas' long-term credit rating is pristine. Standard & Poor's and Fitch both ascribe it an A+ rating. Moody's gives it an A2.

BNP Paribas has operations in 78 countries, with 190,000 employees. Its global presence and diverse business operations have helped insulate the bank from the sovereign-debt storms swirling all around it.

Nearly two centuries of history, its solid credit ratings, and its continued growth amid Europe's longest recession were all good reasons to like BNP Paribas. And the valuation of the stock makes it an incredible opportunity for value-oriented investors.

Like most banks around the world, BNP Paribas' profits dipped considerably when the recession hit in 2008. Since then, however, earnings have grown every year. It has done so by cutting bad assets and recapitalizing well before the ECB decided to regulate Euro banks' leverage ratios.

BNP Paribas has shed 62 billion euros in risk-weighted assets since the beginning of 2012. Excluding provisions set aside for Greek bonds, the cost of BNP Paribas' debt has dropped 9.2% in the last 20 months.

Revenues have increased a modest 0.8% since 2011, but the company is 2.2 times more liquid than it was 20 months ago, with 69 billion euros of cash on hand.

In essence, BNP Paribas has a 20-month head start on most European banks as they try and clean house before the ECB starts monitoring their books.

The stock currently trades at just 9.5 times estimated earnings for 2013. Looking forward to 2014, the PE ratio falls to just 7.8. Meanwhile, the average European bank trades at 9.2 times next year's earnings estimates. And the company's price-to-book ratio is equally impressive at 0.7.

As the tide slowly turns for the better in Europe, investors will start to trickle back in search of bargain investments. Few companies—banks or otherwise—look like more of a bargain than BNP Paribas.

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