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Did the Wrong Banks Bounce?
10/06/2011 3:29 pm EST
Oversold 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.
At least I did. I bought them precisely because they weren’t overexposed 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 Italian and Spanish debt (20%).
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 Société Générale (GLE in Paris or SCGLY in New York), at 51% of current market cap.
And so what happened in yesterday’s big oversold bounce?
BBVA climbed all of 12 cents a share, to $8.36, but UniCredit was up 7.1% and Société Générale was up 8.6%. Today the pattern is much the same, with Société Générale closing up 5.6% in Paris and UniCredit up 3.8% in Milan versus a 2% gain for Banco Bilbao Vizcaya in New York at 2 p.m. New York time.
Even Belgium’s KBC Groep (KBC.BB in Brussels) is up 10.1% today, though 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 wind 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 here.
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