European financials are overleveraged
Almost 1100 people have green thumbed Banco Santander (STD) on CAPS. It has a 4 star rating along with LYG, BBVA, NBG, IRE, etc. European financials have been hammered the past few years - does it make sense that they will outperform going forward?
I don't think so. Large European financials are much more leveraged than large US financials. The problem is too big to earn their way out (even if the European sovereign debt market cooperates). Instead, they will be forced to raise equity, possibly at unattractive prices. Leverage reduction will be driven by Basel III, and one would hope by survival instinct. See Dexia, MF Global, etc.
By my calculations, large European banks have an average tangible leverage ratio of 30 vs 15 for large US banks, and large European insurers have an average tangible leverage ratio of 25 vs 10 for large US insurers.
Santander's tangible leverage ratio of 22 makes it one of the less leveraged European banks, but more leveraged than any US bank. If you want international banking exposure, I prefer Citigroup (14) or Banco Santander Brasil (8). I'd definitely stay away from Prudential UK (104), BBVA (45) and Deutsche Bank (58). Over the last year European banks have underperformed, and I think that trend will continue until Basel III is fully implemented along with massive capital raises.