Deutsche Bank AG (DB)

You could do a lot worse than owning the German banks right now. The German market and the banks have been hit particularly hard. Earnings were a little bit below expectations recently, but not bad across-the-board. Valuations are extremely attractive. They are impacted more aggressively by the Russian situation, which is why Germany has not been as quick on the sanctions.

Risk is even higher than it is for ING (ING-N), but he is not nearly as confident that it will fare well over the next 3-5 years. Stock is off because they are going to have to do a capital raise this year in order to solidify their balance sheets. They have many things on the asset side of the balance sheet, whose fair value is potentially significantly below the carrying value. For regulatory purposes, they need to shore that ratio up.

Their dividend is €0.75 and has been that way since 2010, down from €4.11 in 2008. They were not able to recover their business fast enough to generate the free cash flow to get the dividends back up. There is still the big cloud overhead that they are doing a big "rights issue" right now, simply because they have all these litigation issues down the road.

Long Bundesrepublik Deutchland 3.25% 1/2020 Bond and Short Deutsche Bank 5.00% 6/2024 Bond. He made a 10% gain on this trade just today. ECB is about to take over regulation of the European banking system. Thinks they will need $300 Billion in recapitalization.

Thinks you will do very, very well. Benefit from better economic growth. Big capital markets business, particularly in Europe. Reasonable valued.

He is looking at this. Has a few more problems than other companies but from a valuation basis, this is one of the cheaper European banks. Could be a winner over the next few years.

(Market Call Minute) European banks are going to do better next year.

He is somewhat bearish on Europe but it is working right now. The financials should do well but this one is a hold. Europe is healing but problems are still there. Generally the German banks did take a lot of the subprime stuff. You are better with US names if you want to play the recovery story.

Has started to go back into these in the last couple of years. He looks for banks that didn’t take any European TARP money, which tells a lot about the managers, as well as the countries that they are in. This one is in Germany, the strongest European economy right now. Not a bad entry point for 3-5 years. (See Top and Past Top Picks.)

His fund has been very underweight European banks for quite a long time. However, he does now own this one. Recently raised some capital, which should meet their needs for Basil III, which the banks have to meet in a few years. Their investment banking division is improving dramatically. Very attractive valuation.