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28-12-2024 : Between American and European universal banks, there's much more than an ocean

In 2008, the leading American bank J.P. Morgan had a market capitalization of €75 bn, and the top 10 European banks 7 times more, at around €510 bn combined. Today, J.P. Morgan's market capitalization is €675 billion, a third more than the sum of the market capitalizations of the top 10 banks in the eurozone. BNP Paribas, Intesa Sanpaolo and Santander, the leading banks in the eurozone on any given day, each have a market capitalization of less than €70 billion. Finally, the Euro Stoxx index of European banks is at its early 1997 level.

Unlike non-financial companies, the equity multiple (PBR) is an important valuation tool for banks; the higher their return on equity, the higher the PBR.

When we take the 4 US universal banks and the 10 largest European universal banks and run a linear regression of their PBR against their return on equity, the R2 is mediocre: 37%. When we repeat the same exercise with two subsets, the correlation between PBR and ROE for US banks is almost perfect at 99%, and excellent for European banks at 80%. This results in the graph illustrated here, which shows that for the same return on equity, US universal banks are valued at around 2 times more than their European counterparts.

For example, Citigroup, the worst performer in America since the financial crisis, with a 4.2% return on equity in 2023, is valued at the same 0.7 PBR as Santander, which has almost three times the return on equity (11.2%). Or that UniCredit, which has the same return on equity as J.P. Morgan (16%), is valued at 1.1 compared with 2.2 for J.P. Morgan.

In terms of P/E ratios, the situation is similar: between 6 and 9 in Europe (with an average of 7) versus 13.5 to 16.5 in the United States (average of 15). Closely tied to their core market, European banks have, according to analyst consensus, zero growth prospects to 2028, compared with 7.3% for their American counterparts.

The composition of the samples alone (there are 4 universal banks in the USA, compared with over 10 in Europe) says it all in this business, where size is of major importance. In Europe, the national public authorities, by de facto refusing to allow the fungibility of prudential capital at European level, by giving tax advantages to investments in debt products rather than equities, by opposing cross-border mergers (UniCredit - Commerzbank AG) except in the event of bankruptcy (BNP Paribas - Fortis), and by doing little to revive securitization which, by taking loans off bank balance sheets as in the USA, would improve profitability, bear a crushing responsibility for this situation.

 

21-12-2024 : The forthcoming IPO of Asmodée, European leader in board games

Benefiting from a low-concentration sector and its passage through the hands of several successive LBO funds (Montefiore, Eurazeo and PAI), Asmodée has been able, through internal and external growth, to increase its sales from €110 million in 2013 to €1,288 million this year, with operating income of €188 million. In 2022, Asmodée was sold to the listed Swedish video game group Embracer. But since this acquisition, Embracer's market value has fallen by a factor of 4 to €3.4 billion. In an attempt to remedy this fall in value, Embracer will split into 3 entities, including Asmodée, at the beginning of 2025.

As Asmodée's net bank and financial debt to EBITDA ratio is more than 4 times, Embracer will, prior to the IPO, inject an additional €400 million of equity into Asmodée to reduce its net debt to EBITDA ratio to a more normal level for listed groups of 2.2 times, and give it the financial resources to resume an external growth strategy. Indeed, the risk aversion of stock market investors is quite different from that of LBO funds, which are comfortable with 4 to 7 times debt on most of their portfolio companies.It's true that companies with net debt/EBITDA multiples of this magnitude can be found on the stock market, but this is usually the result of an accident where EBITDA has plummeted, propelling the ratio to heights worthy of companies under LBO.

As long as its indebtedness does not fall below 2 times EBITDA, Asmodée has no intention of paying dividends, which can only delight its future shareholders, since the company has demonstrated real know-how in acquiring competitors and bringing them up to its profitability standards, thereby making investments that yield far more than their cost of capital and creating value. In fact, shareholders are only thirsty for dividends when the company is no longer able to find and carry out investments that yield a return in excess of its cost of capital, in order to utilize all the free cash flow it generates. In this case, dividends enable the reallocation of equity from mature companies to others with better development prospects and the equity needs to finance them.

In conclusion, as Embracer is listed in Sweden, Asmodée will naturally be listed on the same market, in the midst of 1,140 other listed companies, and only 820 in Paris, whereas GDPs are in a ratio of 1 to 3, illustrating a true share culture in Sweden.