Sunday, September 11, 2011

High probability trading opportunity in European banking stocks?

On Friday gossip about the potential Greek default has pushed the stock price of Bank of America to the level they had been before Warren Buffett invested $5B in the company.

The same fear is driving down prices of the European banks. From the beginning of the year, Societe Generale dropped 56.29%, Deutsche Bank 40.17% and BNP Paribas 37.25% (based on the ADRs).

While Bank of America is definitely in the red this year (EPS= -1.65), the fall of the stock prices of the still profitable European banks has actually made them pretty attractive from the P/E perspective (4.05 for SG, 4.62 for BNP and 10.10 for DB).

There is however one critical risk factor that weights heavily on the value of the European banks - the stability of the eurozone. Even if the banks direct exposure to the sovereign debt of the unstable countries may be limited, there still is a significant risk of domino and secondary effects caused by the default of even the smallest eurozone member country.

On the other hand it is hard to imagine German or French government allowing their largest banks to fall...

The previous analysis of the extreme oversold levels for S&P500, may suggest that the prices of the European banks may be close to the levels offering high probability long trading opportunity. The model requires re-calibration for higher volatility of individual stocks. And one needs to assume that the banks will survive the possible shock.

Stay tuned :)

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