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Leading value investor and money manager John Buckingham sees upside potential in two banking stocks — one based in Canada and the other in France. Here’s his overview from The Prudent Speculator.

Canadian Imperial Bank (CM), often referred to as CIBC (note that the ticker is CM), is the fifth-largest Canadian bank by market capitalization, providing banking services through three operating segments: Retail and Business Banking, Wealth Management and Wholesale Banking.

In fiscal Q4, CM earned $2.25 per share, versus the $2.05 consensus estimate, and generated a robust return on equity measure of 15.8%. The bank also reported strong borrower credit quality, loan growth and consistent strength in the Capital Markets business despite the “quiet trading environment.”

CM expects EPS growth around 5% per annum for the foreseeable future. CEO Victor Dodig added, “We advanced our U.S. growth strategy with the acquisitions of PrivateBancorp and Geneva Advisors. We truly have a North American franchise, a platform from which to grow and leverage the strengthening U.S. economy.”

Management also raised the dividend three times in 2017, increasing the payment by 7% versus 2016. Although shares have risen sharply since the June low, we believe that CM still trades at a relative discount with a forward P/E ratio under 11 and a 4.4% dividend yield.

Paris-based Societe Generale SA — known as SocGen — offers commercial, retail, investment and private banking services. The bank has more than 3,000 branches in France, plus an additional 4,000+ branches in nearly 70 other countries.

At the company’s recent Investor Day, management noted multiple points of reform to combat “deep and long-term transformations” in the European banking industry.

Among the areas of improvement, SocGen is focusing on improving customer banking experiences via digitalization, decreasing office costs (including the elimination of some retail bank positions and branches) and jettisoning non-core subsidiaries.

While some analysts have cautioned that the transition may be slow and painful, we think that the strengthening European macroeconomic environment will serve as a tailwind for the bank.

We believe that the 2020 strategic plan is on the ambitious end of the spectrum, and that the company will need to execute strongly on multiple fronts to achieve goals like 3%+ revenue growth per annum, cost reduction to below 17.8 billion euros (fiscal 2016 non-interest expense was 20.2 billion euros) and EPS above 6.50 euros per share (2016 was 4.55 euros).

Despite the challenges, we think SocGen adds geographic diversity to a broadly diversified portfolio and trades at reasonable valuation levels, including a forward P/E of 11.2 and a net dividend yield of 4.0%.

John Buckingham is editor of The Prudent Speculator.

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