Consider Looking Overseas for Bank Stocks

It has been well-covered in the media that big banks in the U.S. are trading at historically low valuations, especially in relation to how much money they're making right now. Many investors believe most large U.S. banks still have legal risk and bad loans on their books as a lingering result of the financial crisis.

So, maybe investors should look abroad for some exposure to the banking sector.  Deutsche Bank is based in Germany, but it has operations all over the world and may be a better choice than its U.S.-based counterparts.

Lingering effects of the crisis
As mentioned, multiple big banks have lingering effects of the financial crisis. Some of these are not directly related to anything that the companies did wrong (as in JPMorgan Chase's case) but are results of the "feeding frenzy" that took place as the stronger institutions scooped up failing ones for pennies on the dollar.

An example of this is Wells Fargo , whose practices during the housing bubble are still causing some issues for the bank. Wells Fargo was sued by the government three separate times last year and has already paid $8.3 billion in settlements related to the crisis.

There are also several pending lawsuits, including one accusing Wells Fargo of "reckless lending" and abusing the FHA loan programs.

Or, in a more publicized case, JPMorgan is facing massive settlements due to bad behavior by its two notable acquisitions, Bear Stearns and Washington Mutual. The latest (unconfirmed) rumors have suggested an astronomical settlement amount of $11 billion, much higher than the $3 billion to $4 billion the company had initially planned on. While so far the settlements don't really seem to be affecting JPMorgan's long-term sustainability, having continuing legal and regulatory risks to worry about is simply more than many investors are willing to deal with.

Low valuation
Deutsche Bank operates in more than 70 countries and has almost $2.5 trillion in assets. The company offers a wide variety of services and derives its revenue from its five distinct divisions, with almost half of the total revenue coming from the corporate banking and securities division. The rest comes from global transaction banking (12%), asset and wealth management (13%), private and business clients (28%), and non-core operations (3%), which was created to keep the bank's riskier assets separate from its core business.

Since the financial crisis, the company has made a great deal of progress in de-leveraging and building up its capital reserves. The company's Tier 1 capital ratio of 10% is a little below many of its peers, which is one of the main reasons shares trade for a discount to their historical levels.

The company trades at a tangible book value of $55.33 per share, meaning it trades at one of the best discounts in the market at slightly less than 0.9 times tangible book value. As you can see from the chart below, this is an enormous discount to the company's historical valuation level.

The 10-year average ratio is 1.27 times tangible book, and it is not unreasonable to expect Deutsche Bank to get there again in the not-too-distant future, especially if Europe's economic issues are resolved.

This is an extremely low valuation for a bank whose projections seem to keep getting revised upward lately. The company is projected to earn $5.27 per share this year, an increase of 40% from last year, and is expected to further improve its profitability next year to $6.46 per share, an additional increase of 23%.

Source: TD Ameritrade.

Looking ahead
With rising assets and revenue and a focus on improving the efficiency of its operations, Deutsche Bank is a viable alternative to its U.S. peers. Using the average price-to-tangible-book-value ratio that we quoted above, this gives us a target price of $61.40 (27% more than the current share price), which I think is certainly attainable within the next few years.

If lingering fallout from the financial crisis years is a major concern to you, Deutsche Bank is a good place to start your search for a more geographically diverse financial portfolio.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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