Escaping a Value Trap
European Banks Through the Eyes of Their Longest-Serving Analyst
“To remember [European] banks as being anything other than a value trap, an investor would have had to be around in the early 2000s. Very few investors are still active from those days.” — Stuart Graham
European stock analysts don’t stay in the game as long as their US counterparts. Dial in to next week’s JPMorgan earnings call and you’ll hear questions from US-based analysts whose careers span decades. The longest serving – Dick Bove – retired in January, aged 83, but three others began filling their spreadsheets in the 1980s, and are still at it today. Last month, Bloomberg profiled Jason Goldberg, a Barclays analyst who has been writing a daily briefing note for 20 years; compared with peers, he’s a newcomer.1
In Europe, it’s an altogether different affair. When Deutsche Bank opened the line to questions on its most recent earnings call, half came from analysts with no professional memory of the global financial crisis. Over at JPMorgan, only a single analyst on the last call wasn’t also on one before 2006 – and she was standing in for someone else. Experience of the financial crisis isn’t a precondition for the job of a bank research analyst but witnessing the shift in industry dynamics it heralded lends some perspective.
One reason European analysts don’t hang around as long is regulation. The introduction of new rules in 2018 changing the way research departments get paid contributed to a hollowing out of the industry. So-called MiFID II laws require European fund managers to pay for research separately from trade execution, and with unbundling came a squeeze on pricing. From its 2017 heights, research spend in Europe has fallen by 30%; in the US, research budgets are down only 12%. With less money to go round, many senior analysts departed, to be replaced by more junior colleagues.2
Last week, one of Europe’s longest serving bank analysts finally called it a day. Stuart Graham started researching bank stocks in 1994 at HSBC James Capel (now HSBC Securities) after having spent six years studying the industry at the Bank of England. Following stints at JPMorgan and then Merrill Lynch, he teamed up with colleagues to launch a specialist financials research firm, Autonomous Research, in 2009. The firm was sold to AllianceBernstein in 2019 but remained … autonomous, and Stuart continued to deliver his unique insights.3
From his perch overlooking the European banking sector, Stuart Graham has seen it all. He watched as the sector grew from 13% of total stock market capitalisation to a peak of 24% in 2006 before crashing to a low of 7% four years ago. He covered the demise of some banks and the recovery of others. He consulted with investors, regulators and bank executives to help them steer the ups and downs (mostly downs) of the sector.
And he popped up on 112 consecutive Deutsche Bank earnings calls. (“It has been enormous fun,” he says.)
To see how 30 years of experience inform his views on European banks today, read on. Spoiler: He’s bullish. He may be checking out, but this isn’t a case of him giving up any hope of a recovery. And because all good analysts start with the footnotes, this week’s piece has some good ones.4
