Capital markets are formed by stories and numbers. We can get carried away by exciting stories, such as the potential of robotaxis and the appearance of medications for obesity. The numbers, such as the ratio of a price of shares to the profits of a company and its profit margins, may seem boring compared.
However, for someone who buys shares, both are important. Stories can give companies a powerful impulse; The numbers highlight the opportunity.
Look at the current numbers of European shares, including the United Kingdom, and its investment antennas can start throwing. The historical price / profits of European shares is attractive in around 18 times on average. The S&P 500 in the United States, compared, is more like 26x, historically high.
Most of this regional difference is explained by the United States that is flooded with technology companies that have exciting stories. European markets, in comparison, have many more financial actions. These seem relatively boring in the front of the history of bedtime, but could their numbers indicate an exciting investment potential?
The actions in the largest bank of the United States, JPMorgan (Price Ratio/Gains 13x), have increased by more than 50 percent in the last year, leaving popular actions such as Microsoft in its path, practically flat.
Most European banks trade between 7 times and 9 times their profits. And they too, They have also worked well. Barclays actions have more than duplicate; The Société Générale de France has risen 65 percent; and the shares at the Santander Bank of Spain have increased 48 percent.
Its profit multiples can be very juicy compared to those of the market in general. But be careful. Banks are not like other companies, and investing in banking actions is not for heart weak.
No one should want banks to grow faster or more slowly than a long -term economy. Banks have a role to fulfill, maintaining our safe deposits and lending money to those who need it, especially housing buyers and smaller companies.
Banks’ profits are generally the difference between two very large numbers: the deposits they possess and the loans they have made. The bankers spend a lot of time thinking about the numbers. For example, they realize that 2025 is a perfect square: 45 times 45. It is also the sum of the first nine cubes, one covered plus two in cubes. . . Up to nine in cubes. The bankers love that kind of thing. The fact that I do so can explain the shortage of the invitations of the dinner I receive.
When interest rates increase, as they did recently, banks benefit because they can get out with a greater margin between what they pay for interest and what they charge. Then, the profits of many banks have increased abruptly since the beginning of 2022, when the central banks began to raise the base rates.
Last week, Société Générala announced that the profits He had doubled In the fourth quarter of 2024. The shares increased 10 percent in one day in the news.
However, these periods of gains bonanza can be fleeting: interest rates can fall and the people you lend cannot pay it. Banks do not enjoy recessions. If your loan rate is only a percentage point or two higher than you pay in deposits, only a few borrowers are needed to break and all your earnings are eaten. Suddenly you are losing your loss.
As banks increases and fall much more dramatically than most, we need to be more conservative to assess them. We need an assessment tool that represents the relatively stable nature of a bank outside the financial crises. The number with which the majority of financial analysts begin is “book value” or “shareholders’ funds. This represents the past profits of the bank that have been retained and belonging to the shareholders.
Taking Lloyds Bank as an example, its book value can be found in its report and accounts: £ 47 billion. Divided by the billions of issues in broadcast, which gives 74 natives of book value per share, and the current price of the shares is 63 pence. Buying a bank action is always risky, but the risks are much lower when the actions are below the book value. In 2007, many banking actions in the United Kingdom were negotiated well above.
After the world financial crisis, regulators forced banks to have much larger reservations. It means that they are sitting in large lots of money that cannot be provided. Relax these requirements and allow banks to lend more (or return more to shareholders) is becoming an increasingly attractive option for politicians desperate for stimulating growth.
The lowest capital requirements could make banks look much better for capital holders. So, despite the fact that the actions have been classified significantly in the last year, it is not necessarily too late to buy.
If you select a bank to invest, you should consider a variety of factors. Does it work in an economy with stable economic perspectives to improve? Do you have a high market share so that you can lead loan rates? Do your actions are negotiated under book value and their profitability has the scope of increasing? Are you directed by stable people who avoid taking risks in loans and trade? Is there a financial crisis around the corner? Refinance a bank in a crisis effectively asks shareholders to return all the dividends they have received and more.
For readers who think that the United Kingdom will enjoy improving growth and believes that the United Kingdom’s real estate market is stable, Lloyds Bank has a dominant franchise. With luck, litigation with respect to loans for incorrect sale can be solved, since this problem hangs on shares. Similarly, readers who believe that the continental European economy will improve could invest in the BNP Paribas actions of France or Banco Santander, which has strong positions in Spain and Latin America.
A massive company in the United Kingdom that has not been discussed much in direct investment lines for years is HSBC. Their shares also operate with a 20 percent discount to book value, have a dividend yield of 5.5 percent and have exposure to economic recovery in the United Kingdom, Europe and China.
The new management team seems determined to simplify its very complex structure, which can lead to European and Hong Kong companies eventually divided, which could generate the highest actions.
In short, then, banks may not be the most exciting story, but at this point in the economic cycle, when the debt seems manageable and economies are at least stable, the numbers are interesting. Choose your choice. Not simply “buy and forget.” Being the owner of banking actions is like collecting pound coins in front of a steam, fun until flattened.
Simon Edelsten is Fund Administrator at Goshawk Asset Management