I think you raise a relevant and interesting point here.
My view is that Nordic banks should trade at a premium to most other European Banks (note I own Handelsbanken). My logic is based on the following:
- Macro regional context
Other European nations do not have the same safety nets as the Nordic countries. From a banking perspective this is vital, covering areas such as unemployment, and other benefits that over a longer duration helps banks to reduce credit losses. Compare this to especially Spain, Italy where economical trust resides in family. Nordic countries with low gini coefficients and high social capital provides a good basis for banking. Also in particular the Scandinavian countries have good macro economics in general. Finland lags in this perspective, and is also the main reason why I do not invest in pure play Finnish banks.
- Banks are essentially black boxes
More or less all banks are black boxes. By this I refer to that it is almost impossible to figure out and completely understand their balance books and counterparty risk etc. And here Nordic banks have generally less risky bets than other European banks. For example BNP Paribas has a big derivatives department that is probably highly profitable in good times but in bad times not so much.
My point is not to bash BNP. But what investors often like are results that are rather predictable over time, with little changes in results thru different economical cycles. Here for example Handelsbanken is king, whereas DB, Paribas etc have a lot of up and downs.
- Valuation
Of course the relative valuation of for example some European big banks trade at half book mighty sound as really cheap (and could probably also be) but it needs to be put in context of an economical cycle. And today we are at probably peak earnings where all banks, regardless of quality make money.
But the question is how sustainable is this?
No bank I would argue can maintain a return on equity on plus 15 percent. Not even Nordea, which is probably has the best management right now. (Handelsbanken was crazy to fire Frank Jensen, who is probably the best bank CEO in the Nordics if not Europe). And even if Christer Gardell of Cevian oftentimes argues that Nordea should raise their target to 15 percent return on equity, the management would put its self up to criticism for not reaching that level every quarter.
To conclude: I would argue there should be a valuation gap between the Nordic banks which operate in most Nordic countries. But that is not to say that some European banks might be too cheap at the moment.
The key question going forward is of course how credit losses evolve across the banking spectrum and also any political bashing over how much money they make at the moment starts to steer the political agenda. It is already happening in Spain, Denmark and Sweden. Also to reflect is how the big US banks plan to make more money in Europe. They are stealing market share in M&A from big banks in Europe.
And with Brexit a lot of the USA banks have been forced to relocate staff to Paris, Milano and Frankfurt. And this have resulted in that they have expanded to normal banking and not only dealing with M&A at the cost of big banks in Europe
Sorry for the long reflection.
