The terrible unfairness of bouncing (for European bank stocks at least)

10/06/2011 2:58 pm EST


Jim Jubak

Founder and Editor,

Over-sold rallies can be extremely frustrating—and this one is no exception.

The stuff that sold off most in the rout before the rally—and often for very good reason—usually bounces back the most.

That’s exactly what’s happening with European bank stocks right now.

If you did your due diligence and carefully checked to see who was risky and who was nice, you wound up owning European bank stocks like Banco Bilbao Vizcaya (BBVA) and Banco Santander (STD).

At least I did. I bought them precisely because they weren’t over-exposed to the Greek debt crisis, because they weren’t looking at a need to raise big capital even under a scenario of a 60% write-off on the value of Greek government debt, and then descending percentages of write-offs on Portuguese and Irish government debt (40%), and then Italian and Spanish debt (20%). (Banco Bilbao Vizcaya is a member of my Jubak’s Picks portfolio and Banco Santander is a member of my Dividend Income portfolio )

Even in that scenario, as run by JPMorgan Chase, Banco Bilbao Vizcaya needs to raise capital equal to just 4% of its current market capitalization.

Contrast that to JPMorgan’s calculations of how much capital Italy’s UniCredit (UCG.IM in Milan) would have to raise in that scenario—63% of its current market capitalization—or France’s Societe Generale (GLE in Paris or SCGLY in New York)—51% of current market capitalization.

And so what happened in yesterday’s big oversold bounce?

Banco Bilbao Vizcaya climbed all of 12 cents a share to $8.36 but UniCredit was up 7.1% and Societe Generale was up 8.6%. Today the pattern is much the same with Societe Generale closing up 5.6% in Paris and UniCredit up 3.8% in Milan versus a 2% gain for Banco Bilbao Vizcaya in New York as of 2 p.m. New York time. Even Belgium’s KBC Groep (KBC.BB in Brussels) is up 10.1% today and JPMorgan Chase calculates that this bank would need to raise capital equal to 87% of its current market capitalization under this scenario.

Doesn’t seem fair—or logical, does it? But before you decide to throw all caution to the winds or to stop doing due diligence entirely remember that the market is frequently not fair or logical in the short run.  But in the long run fundamentals do seem to count. And you’ll be glad that you worked to control your risk when we next revisit the euro debt crisis and fear rules the market again.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Bilbao Vizcaya and Banco Santander as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at

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