Commerzbank (ETR:CBK) (FRA:CBK) was a highly-profitable bank and the lender of choice for many of the German companies that typify the strength of “Made in Germany.” Today, the bank is in a very different position.
Not everything has changed for Commerzbank. Financially, the rug was pulled out in 2009, and the bank has been reeling ever since. But it’s still has a very strong position within a strong economy. And Commerzbank is also still a leader in lending to Germany’s vaunted Mittelstand.
But is it a stock worth buying today?
Getting to yes
Doing the research necessary to really figure out whether I want to invest in a company takes time. And while I’d love to sit around all day every day researching every stock in existence (that’s not sarcastic, I really do love researching stocks), that’s just not practical.
So in order to winnow down the vast universe of stocks, there are a few numbers that I like to look at to get an idea whether or not a stock is worth my time. For financial companies, those numbers are:
- Return on equity –To me, RoE is an all-around useful measure of how effective the company is. I generally want a RoE above 12%.
- Long-term book value growth per share plus dividend yield – Investors in financial companies get their returns in two primary ways: Growth in per-share book value and dividends. In some cases a financial company will focus on one and the other will be lower. In some cases, they balance the two. That’s why I like to look for a combination of both.
- Price-to-book value – I’m not a cheap-stock snob, but I still don’t like to overpay for the financial companies that I buy. Using P/BV along with RoE, I can calculate what I like to call “return to investor.” I like to see that number be above 10%.
Just three numbers may not seem like enough to fully understand a company – and it’s not! These numbers are simply aimed at reducing the universe of stocks. And I don’t use them as a hard line. In some cases, the numbers may look poor, but there’s still investment opportunity.
Now, let’s see how Commerzbank stacks up.
Return on equity
Commerzbank falls well short of the return on equity that I want. In fact, it’s been since 2007 that the bank reported a full-year return on equity (13.1%) that passed my 12% ideal. If there’s a bright spot for investors, it’s that RoE has improved in recent years – from 0.2% in 2012 to 2.6% in 2014.
We could describe the problem as a “hangover” from the global financial crisis. Commerzbank has lumped a lot of assets – nearly 45 billion EUR worth at the end of 2014 – into a segment it calls “Non-Core Assets.” This segment produces little revenue for the bank, but racks up hefty losses. Outside of “Non-Core Assets,” the picture doesn’t look nearly as dire. Commerzbank’s “Core Bank” operations had a return on equity of 9.2% for 2014, while the powerful “Mittelstandsbank” segment had an attractive 17.6% RoE.
These are tempting numbers. But the problem is that an investor can’t just invest in the Commerzbank that excludes the profit-draining “Non-Core Assets” segment. So a prospective investor would have to trust that Commerzbank management not only has a good plan to deal with that segment, but has learned lessons from the last banking panic so that when the next financial downturn rolls around – and yes, there always is another – Commerzbank won’t end up with a brand new set of “Non-Core Assets” (or worse).
Long-term book value growth per share plus dividend yield
I won’t bother putting the chart up here because, well, it’s ugly. And long-term Commerzbank investors know all too well how poorly the bank has performed when it comes to growing – I mean, destroying – book value.
For those not as familiar with Commerzbank’s historical performance, according to S&P Capital IQ, the bank reported a book value per of 184.50 EUR at the end of 2004. At the end of 2014, that had shrunk to 23.42 EUR per share.
Most of that was lost during the global financial crisis – the figure was as high as 229.90 EUR in 2007 and had fallen to 85.10 EUR by the end of 2009. But there’s still been a significant amount of value lost since then. The dividend is of no help in offsetting this drastic decline in book value per share because… there is no dividend. Commerzbank stopped paying its dividend when the tough times set in and it hasn’t reintroduced it yet.
In all, Commerzbank fails on this measure pretty badly.
Of all the numbers that we could look at for Commerzbank, this is may be the most interesting from an investor’s perspective. Especially if you’re a value investor.
With a price-to-book value of just 0.5x, Commerzbank looks like an extremely cheap stock. Commerzbank has been through tough times and the outlook for the years ahead isn’t perfectly sunny. But the price tag on the stock reflects that. The question is, does the valuation fully take Commerzbank’s situation into account?
As I mentioned above, I like to use RoE and price-to-book value to calculate “return to investor.” That’s done by simply dividing RoE by P/B. In this case, that comes to 5.2% — better than when we consider RoE alone, but still not terribly attractive.
Once again, we’re left needing to trust in the turnaround efforts at Commerzbank to justify an investment.
I’m not a turnaround investor – like Warren Buffett, I’d prefer to invest in great companies at good prices, as opposed to buying good (or not so good) companies at great prices.
Nevertheless, I’m going to keep Commerzbank on my radar. The position that the bank has within the powerful German economy is valuable. And banking is a cyclical industry and I believe we’re still in lower end of a downswing that started six years ago.
So is Commerzbank a stock that I’d buy? I’m still not sure, but I think the opportunity looks good enough to put it under the microscope.
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