HSBC Holdings plc (ADR) (HBC), Deutsche Bank AG (USA) (DB): A Proposed Portfolio of High-Quality European Banks

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A world-wide leader trading below book value

Deutsche Bank AG (USA) (NYSE:DB), the banking leader of Europe’s biggest and strongest economy (Germany), is strangely cheap. Of course, Mr. Market has a point when it values Deutsche Bank AG (USA) (NYSE:DB) so lowly. There are risks from litigation, regulation and a still tough macro environment; the bank is a strong international player, however, and has a strengthened capital position. After the equity increase, the bank has a 9.5% Basel III ratio, which is ahead of most of its peers (such as Barclays PLC (ADR) (NYSE:BCS) or JPMorgan Chase & Co. (NYSE:JPM).)

With underlying costs that are 9% better than consensus and with revenues and provisions also ahead of expectations, I expect investors to start focusing on the future and leaving behind the bank’s 2012 dividend cut and recent capital increase. Deutsche Bank AG (USA) (NYSE:DB) trades at 78% its tangible book value and 7.8 times its price-to-earnings ratio. I expect the bank’s dividend to remain low at 2% until Basel III requirements are met. Given its low dividend, I would assign this high-quality banking institution “just” 30% out of this European banking portfolio.

Foolish conclusion

The performance of this high-potential portfolio will be tied to Europe’s economic performance, which I think should ameliorate going forward. While you wait for the market to re-rate these stocks, you can enjoy a high-cash dividend yield. The weighted cash yield of this portfolio comes at a reasonable 3.4%. That said, I would expect this yield to grow fast from 2014 onwards.

The article A Proposed Portfolio of High-Quality European Banks originally appeared on Fool.com and is written by Federico Zaldua.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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