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Loeb Goes Deep Sea Fishing

- By Bram de Haas

Dan Loeb of Third Point Capital went really out of his way to find value this quarter. After recent successes by buying into U.S. banks like JPMorgan (JPM) right before taking off he's looking for a repeat in Europe. His quarterly letter revealed, of all things, he chose to buy the Italian Unicredit SpA (USCFF). Italy's debt to GDP sits at 126% which is only Europe's second worst ratio because the E.U. is stringing along Greece with an unsustainable large debt.


UniCredit SpA is a very large bank with a network across 1 7 countries with more than 8,500 branches and over 147,000 employees. Its focused position in Western and Eastern Europe gives the group one of the region's major market shares.

Loeb views the European valuations as highly attractive:


...European banks have maintained lower valuations than US banks (0.7x vs. 1.2x book), driven by a lack of confidence in capital and an inadequate clearing mechanism for legacy non-performing loans (NPLs). The ECB recently noted there were still EUR 921 billion of NPLs at significant EU financial institutions. However, its guidance on NPLs, released with NPL in ratios March, >3x offered the level a firm of US but and pragmatic Japanese approach banks to accelerate NPL resolutions and Q1 2017 was the second biggest quarter for announced capital issuance in over five years...



I've put together an overview of European Banks and Loeb is indeed correct valuations are comparatively attractive. Unicredit trades at just 0.5x book which is on par with Deutsche Bank (DB) for example. A name like Society General (SCGLY) can be picked up for around the average of 0.7x book.


...While at home the opportunity in financials is linked closely to rising rates, banks in Europe offer a different hook: tangible progress on balance sheet clarity...



The EU had taken a tough stance on recapatilizations of Italian banks by the government and while there's little doubt in the U.S. about the solvability of its major banks this is definitely not the case in (Southern) Europe.


...We view UniCredit's current recapitalization as a definitive clean -up. UniCredit has raised almost two times the capital that was the "consensus" view in mid-2016 and is raising another EUR6+ billion from selling its stake in Bank Pekao and Pioneer Asset Management. This combination of almost EUR20 billion of fresh capital puts the bank at ~12.6% pro forma CET1. UniCredit also cleaned up almost half the NPLs in its Non -Core Bank and took significant upfront charges related to its restructuring plan, which will see headcount reduced by 14% and branches reduced by 25%, all by 2019....



The one caveat I have is that banks are loaded with sovereign debt and given the debt to GDP ratios of Italy and France this is of quite some concern.


...we still see significant upside for UniCredit with shares trading at just 0.65x tangible book, <9.0x our 2018E EPS estimate and <7.5x our 2019E estimate. These forecasts exclude additional potential upside from rising interest rates or better asset quality, despite the significant progress on NPL resolutions and property transactions we have seen in recent quarters...



Loeb bought in with the rights issue that was used to raise capital. Rights issues are often used in Europe but often not very popular with investors. They tend to come after large decreases in the share prices of the companies that employ them to raise capital and survive. A move right out of the value investors playbook. However, given he bought at 0.65x tangible book value Unicredit is an even better opportunity now.

Disclosure: no positions in any stocks mentioned

This article first appeared on GuruFocus.