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The Zacks Foreign Banks Industry will benefit from higher rates as central banks around the globe are expected to continue to hike interest rates this year to combat inflation. Thus, rising interest rates, along with higher loan demand, will support revenue growth for industry players like HSBC Holdings plc , Barclays PLC and Societe Generale.
While banks' restructuring initiatives to focus on core operations will be fruitful in the long run, they have resulted in higher costs. Also, uneven economic recovery in developed and emerging nations has been hampering foreign banks' revenue growth.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization might have federally and state-chartered offices in the country, the Federal Reserve plays a major role in supervising their U.S. operations. In addition to providing a broad range of products and services to customers in the United States, the banks offer financial services to corporate clients having businesses in the country.
Additionally, the financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of wholesale and retail services, along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Bank Industry Trends to Watch
Interest Rate Hikes to Aid Top-Line Growth: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it eroded banks' profitability to a great extent.
The pace of economic recovery also remains uneven in the developed (home to a number of major foreign banks) and emerging nations. This has been hampering banking operations globally. Nevertheless, almost all the central banks across the globe have raised rates a couple of times so far this year to counter rising inflation, which has provided some support to banks' top-line growth.
Almost all central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of England, have indicated more such hikes in the year. Thus, higher rates are expected to help raise the net interest income and margins of banks.
Restructuring Efforts Likely to Result in Higher Costs: Several foreign banks have been engaging in business restructuring efforts. Many banks have been divesting/closing non-core operations to increase focus on core businesses and regions. While restructuring efforts are expected to aid growth in the long run, these have been leading to a rise in costs in the near term. Increased costs related to technology upgrades might also hamper banks' bottom-line growth to some extent.
Uneven Global Economic Recovery Might Pose a Concern: After the coronavirus outbreak in mid-March 2020, business confidence was shattered across the globe as the pandemic loomed over corporate earnings and economic growth. While the record pace of vaccine coverage globally aided economic recovery in most parts of the world in the latter half of the last year, the emergence of newer strains of the virus slowed growth in those regions. Banks' performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks' financials to an extent in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Foreign Banks Industry is a 66-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #76, which places it in the top 30% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in the group's bottom-line growth potential. The industry's 2022 earnings estimates have been revised 6.3% higher since September 2021 end.
Before presenting a few stocks that you may want to consider for your portfolio, let's check out the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Zacks Foreign Banks Industry has outperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 25.7%. The S&P 500 composite has rallied 15.3%, and the Zacks Finance Sector has appreciated 19.5%.
Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.55X. When compared with the highest level of 2.09X over the past five years, there is a decent upside left. Notably, the current value compares with the median value of 1.58X.
Additionally, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 10.05X.
As finance stocks typically have a lower P/TBV ratio, comparing foreign banks with the S&P 500 might not make sense to many investors. But a comparison of the group's P/TBV ratio with that of its broader sector ensures that it is trading at a decent discount. The Zacks Finance Sector's trailing 12-month P/TBV of 4.36X and the median level of 3.85X for the same period are above the Zacks Foreign Banks Industry's ratios.
3 Foreign Banks to Bet On
HSBC: With its headquarter in London, HSBC provides a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of Jun 30, 2022, it had $2.99 trillion in assets.
For the past few years, HSBC has been undertaking measures to bolster its performance, with a special focus on building operations in Asia, including Hong Kong and China. In sync with this, the company acquired 100% of the issued share capital of AXA Insurance in Singapore for $529 million this February and agreed to acquire L&T Investment Management Limited for $425 million.
HSBC intends to be a top bank for high-net-worth and ultra-high-net-worth clients in Asia. In 2020, the company initiated a digital-first, hybrid financial management platform — HSBC Pinnacle — in mainland China to bank on the increasing wealth in the region.
HSBC plans to restructure its operations to improve operating efficiency. In February 2020, the bank announced its transformation plan, which is aimed at reshaping underperforming businesses, simplifying complex organizations and reducing costs. As part of the initiative, the company expects to incur $7 billion in charges and achieve at least $5.5 billion of cost savings by 2022-end and an additional $0.5-billion savings in the next year.
HSBC's brand, capital strength, extensive global network and positioning enable it to continuously attract and retain clients. The company's product and service leadership in alternative investments, foreign exchange, credit, investment advice and many other cross-border banking services help it in widening its customer base.
Currently, HSBC sports a Zacks Rank #1 (Strong Buy). The stock has lost 4.4% on the NYSE over the past three months. The Zacks Consensus Estimate for the company's 2022 earnings has been revised 9.7% upward over the past 60 days. Its 2023 earnings estimates have been revised 13.8% upward.
Barclays: Headquartered in London, Barclays is a major global banking and financial services company, with £1,589.2 billion ($1,930.2 billion) in total assets as of Jun 30, 2022. The Zacks Rank #2 (Buy) company has been striving to simplify operations and focus on core businesses over the past few years.
With this aim, BCS restructured its business lines into two divisions and divested/closed several non-strategic and less profitable operations globally. The bank completed the ring-fencing of its investment banking operations in April 2018, while reintegrating its non-core division into core operations in July 2017. Driven by these initiatives, the company's profitability is expected to improve over time.
Barclays' cost-saving efforts are expected to further support the bottom line in the near term. While total operating expenses increased in 2021 and the first half of 2022, the same declined, seeing a CAGR of 2.4% over the last six years (2016-2021). Overall costs are expected to remain manageable as business restructuring initiatives continue to offer support. Over the medium term, the cost-to-income ratio is targeted below 60%.
While concerns related to the impact of the pandemic on Barclays' financials continue to make us apprehensive, the company keeps rewarding shareholders with enhanced capital deployments. Recently, BCS announced a half-yearly dividend of 2.25 pence per share. For 2021, the company announced a dividend of 6 pence per share, including a 2021 dividend of 4 pence per share, which was paid out on Apr 5, 2022. Barclays intends to initiate further share buybacks of up to £500 million.
Shares of the company have lost 6.8% over the past three months on the NYSE. The Zacks Consensus Estimate for BCS' 2022 and 2023 earnings has moved up 12.3% and 4.8%, respectively, in the past 60 days.
Societe Generale: Based in Paris, France, Societe Generale provides banking and financial services to individuals, businesses and institutional investors in Europe and internationally. The company combines financial strength and proven expertise in innovation with a strategy of sustainable growth. It operates through three segments.
The French Retail Banking segment includes the Societe Generale, Credit du Nord and Boursorama brands, which offer a full range of financial services with omni-channel products at the cutting edge of digital innovation. The International Retail Banking, Insurance and Financial Services segment has networks in Africa, Central and Eastern Europe. The Global Banking and Investor Solutions segment offers recognized expertise, key international locations and integrated solutions.
With a view to managing costs after incurring huge losses in the first half of 2020 due to the dismal performance of its equities derivatives business, Societe Generale decided to divest its asset management business, Lyxor Asset Management. In April 2021, it was announced that Lyxor was being divested to Amundi for €825 million ($979 million).
Societe Generale plans to reduce costs by €450 million annually by 2022-2023. The plan relies on the company's move of combining French retail operations with its Credit du Nord subsidiary to enhance profits. As part of the effort to restructure its credit and equity derivatives structured business, the company planned to cut 640 jobs in France. This May, SCGLY announced its withdrawal from Russia with the finalization of the disposal of Rosbank and its Russian insurance subsidiaries to Interros Capital.
The Zacks Consensus Estimate for the company's 2022 earnings has increased 42.4% over the past 60 days. Earnings estimates for 2023 have been revised 8.3% upward for the same period. Shares of SCGLY have lost 14.3% on the NYSE over the past three months. The company currently carries a Zacks Rank #2.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights HSBC Holdings, Barclays PLC and Societe Generale
For Immediate Release
Chicago, IL – September 9, 2022 – Today, Zacks Equity Research discusses HSBC Holdings plc (HSBC - Free Report) , Barclays PLC (BCS - Free Report) and Societe Generale (SCGLY - Free Report) .
Industry: Foreign Banks
Link: https://www.zacks.com/commentary/1977923/3-foreign-banks-industry-stocks-to-gain-from-increasing-rates
The Zacks Foreign Banks Industry will benefit from higher rates as central banks around the globe are expected to continue to hike interest rates this year to combat inflation. Thus, rising interest rates, along with higher loan demand, will support revenue growth for industry players like HSBC Holdings plc , Barclays PLC and Societe Generale.
While banks' restructuring initiatives to focus on core operations will be fruitful in the long run, they have resulted in higher costs. Also, uneven economic recovery in developed and emerging nations has been hampering foreign banks' revenue growth.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization might have federally and state-chartered offices in the country, the Federal Reserve plays a major role in supervising their U.S. operations. In addition to providing a broad range of products and services to customers in the United States, the banks offer financial services to corporate clients having businesses in the country.
Additionally, the financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of wholesale and retail services, along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Bank Industry Trends to Watch
Interest Rate Hikes to Aid Top-Line Growth: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it eroded banks' profitability to a great extent.
The pace of economic recovery also remains uneven in the developed (home to a number of major foreign banks) and emerging nations. This has been hampering banking operations globally. Nevertheless, almost all the central banks across the globe have raised rates a couple of times so far this year to counter rising inflation, which has provided some support to banks' top-line growth.
Almost all central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of England, have indicated more such hikes in the year. Thus, higher rates are expected to help raise the net interest income and margins of banks.
Restructuring Efforts Likely to Result in Higher Costs: Several foreign banks have been engaging in business restructuring efforts. Many banks have been divesting/closing non-core operations to increase focus on core businesses and regions. While restructuring efforts are expected to aid growth in the long run, these have been leading to a rise in costs in the near term. Increased costs related to technology upgrades might also hamper banks' bottom-line growth to some extent.
Uneven Global Economic Recovery Might Pose a Concern: After the coronavirus outbreak in mid-March 2020, business confidence was shattered across the globe as the pandemic loomed over corporate earnings and economic growth. While the record pace of vaccine coverage globally aided economic recovery in most parts of the world in the latter half of the last year, the emergence of newer strains of the virus slowed growth in those regions. Banks' performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks' financials to an extent in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Foreign Banks Industry is a 66-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #76, which places it in the top 30% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in the group's bottom-line growth potential. The industry's 2022 earnings estimates have been revised 6.3% higher since September 2021 end.
Before presenting a few stocks that you may want to consider for your portfolio, let's check out the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Zacks Foreign Banks Industry has outperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 25.7%. The S&P 500 composite has rallied 15.3%, and the Zacks Finance Sector has appreciated 19.5%.
Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.55X. When compared with the highest level of 2.09X over the past five years, there is a decent upside left. Notably, the current value compares with the median value of 1.58X.
Additionally, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 10.05X.
As finance stocks typically have a lower P/TBV ratio, comparing foreign banks with the S&P 500 might not make sense to many investors. But a comparison of the group's P/TBV ratio with that of its broader sector ensures that it is trading at a decent discount. The Zacks Finance Sector's trailing 12-month P/TBV of 4.36X and the median level of 3.85X for the same period are above the Zacks Foreign Banks Industry's ratios.
3 Foreign Banks to Bet On
HSBC: With its headquarter in London, HSBC provides a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of Jun 30, 2022, it had $2.99 trillion in assets.
For the past few years, HSBC has been undertaking measures to bolster its performance, with a special focus on building operations in Asia, including Hong Kong and China. In sync with this, the company acquired 100% of the issued share capital of AXA Insurance in Singapore for $529 million this February and agreed to acquire L&T Investment Management Limited for $425 million.
HSBC intends to be a top bank for high-net-worth and ultra-high-net-worth clients in Asia. In 2020, the company initiated a digital-first, hybrid financial management platform — HSBC Pinnacle — in mainland China to bank on the increasing wealth in the region.
HSBC plans to restructure its operations to improve operating efficiency. In February 2020, the bank announced its transformation plan, which is aimed at reshaping underperforming businesses, simplifying complex organizations and reducing costs. As part of the initiative, the company expects to incur $7 billion in charges and achieve at least $5.5 billion of cost savings by 2022-end and an additional $0.5-billion savings in the next year.
HSBC's brand, capital strength, extensive global network and positioning enable it to continuously attract and retain clients. The company's product and service leadership in alternative investments, foreign exchange, credit, investment advice and many other cross-border banking services help it in widening its customer base.
Currently, HSBC sports a Zacks Rank #1 (Strong Buy). The stock has lost 4.4% on the NYSE over the past three months. The Zacks Consensus Estimate for the company's 2022 earnings has been revised 9.7% upward over the past 60 days. Its 2023 earnings estimates have been revised 13.8% upward.
You can see the complete list of today's Zacks #1 Rank stocks here.
Barclays: Headquartered in London, Barclays is a major global banking and financial services company, with £1,589.2 billion ($1,930.2 billion) in total assets as of Jun 30, 2022. The Zacks Rank #2 (Buy) company has been striving to simplify operations and focus on core businesses over the past few years.
With this aim, BCS restructured its business lines into two divisions and divested/closed several non-strategic and less profitable operations globally. The bank completed the ring-fencing of its investment banking operations in April 2018, while reintegrating its non-core division into core operations in July 2017. Driven by these initiatives, the company's profitability is expected to improve over time.
Barclays' cost-saving efforts are expected to further support the bottom line in the near term. While total operating expenses increased in 2021 and the first half of 2022, the same declined, seeing a CAGR of 2.4% over the last six years (2016-2021). Overall costs are expected to remain manageable as business restructuring initiatives continue to offer support. Over the medium term, the cost-to-income ratio is targeted below 60%.
While concerns related to the impact of the pandemic on Barclays' financials continue to make us apprehensive, the company keeps rewarding shareholders with enhanced capital deployments. Recently, BCS announced a half-yearly dividend of 2.25 pence per share. For 2021, the company announced a dividend of 6 pence per share, including a 2021 dividend of 4 pence per share, which was paid out on Apr 5, 2022. Barclays intends to initiate further share buybacks of up to £500 million.
Shares of the company have lost 6.8% over the past three months on the NYSE. The Zacks Consensus Estimate for BCS' 2022 and 2023 earnings has moved up 12.3% and 4.8%, respectively, in the past 60 days.
Societe Generale: Based in Paris, France, Societe Generale provides banking and financial services to individuals, businesses and institutional investors in Europe and internationally. The company combines financial strength and proven expertise in innovation with a strategy of sustainable growth. It operates through three segments.
The French Retail Banking segment includes the Societe Generale, Credit du Nord and Boursorama brands, which offer a full range of financial services with omni-channel products at the cutting edge of digital innovation. The International Retail Banking, Insurance and Financial Services segment has networks in Africa, Central and Eastern Europe. The Global Banking and Investor Solutions segment offers recognized expertise, key international locations and integrated solutions.
With a view to managing costs after incurring huge losses in the first half of 2020 due to the dismal performance of its equities derivatives business, Societe Generale decided to divest its asset management business, Lyxor Asset Management. In April 2021, it was announced that Lyxor was being divested to Amundi for €825 million ($979 million).
Societe Generale plans to reduce costs by €450 million annually by 2022-2023. The plan relies on the company's move of combining French retail operations with its Credit du Nord subsidiary to enhance profits. As part of the effort to restructure its credit and equity derivatives structured business, the company planned to cut 640 jobs in France. This May, SCGLY announced its withdrawal from Russia with the finalization of the disposal of Rosbank and its Russian insurance subsidiaries to Interros Capital.
The Zacks Consensus Estimate for the company's 2022 earnings has increased 42.4% over the past 60 days. Earnings estimates for 2023 have been revised 8.3% upward for the same period. Shares of SCGLY have lost 14.3% on the NYSE over the past three months. The company currently carries a Zacks Rank #2.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.