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Near-Term Outlook Appears Dull for Foreign Banks Industry

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The Zacks Foreign Banks Industry consists of overseas banks that also have operations in the United States. Since a foreign banking organization might have both federally- and state-chartered offices in the United States, the Federal Reserve plays a key role in supervising their U.S. operations.

In addition to providing a broad range of products and services to U.S. customers, these banks offer financial services to their corporate clients having businesses in the United States.

Moreover, these financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of both wholesale and retail services, along with conducting money-market transactions for their parent organizations, while others involve in developing only specialized services.

Here are the three major themes in the industry:
 

  • Heightening economic uncertainties, thanks to the coronavirus crisis, might affect overseas banking transactions in the upcoming period as well. The COVID-19 pandemic has shattered business confidence, looming over corporate earnings and global growth. Moreover, monetary-policy normalization induced by some central banks across the globe to combat the crisis is expected to further impact foreign banking activities unfavorably.
     
  • Near-term growth prospects of foreign banks are being called into question due to the weak recovery projected by banks in developed nations and the prevalent troubles faced by the financial firms in most emerging economies due to the pandemic. Amid the current turbulence, monetary-policy normalization varies across nations, including the developed ones — which are homes to a number of major foreign banks, — being on the rise but might be unable to support foreign banking operations adequately.
     
  • Sluggishness in global economic growth might dampen the prospects for increasing banking activities. Furthermore, foreign banks in the United States are trying to push the Fed to get some regulatory relief in terms of capital requirements, which are perceived to be too high for carrying out operations profitably.


Zacks Industry Rank Indicates Bleak Prospects

The Zacks Foreign Banks Industry is a 59-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #156, which places it at the bottom 38% 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 consistent underperformance 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 bottom 50% of the Zacks-ranked industries is a result of the bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since August 2019, the industry’s earnings estimate for the current year has been revised 36.3% downward.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.


Industry Lags on Shareholder Returns

The Zacks Foreign Banks Industry has underperformed both the S&P 500 and its own sector in the past year.

While stocks in this industry have collectively depreciated 29.2%, the S&P 500 composite has gained 13.5%, and the Zacks Finance Sector has lost 9.8%.


One-Year Price Performance


Industry’s 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 1.17X. When compared with the highest level of 2.09X and median level of 1.65X over the past five years, there is apparently plenty of upside left.

Additionally, the industry is trading at lower levels when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 15.01X and the median level is 9.55X.


Price-to-Tangible Book Ratio (TTM)

 

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 3.39X and the median level of 3.48X for the same period are way above the Zacks Foreign Banks Industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)


Bottom Line

While the developed nations are yet to make the backdrop favorable for their banks, nothing similar is anticipated even from the emerging economies any time soon. Furthermore, the industry is unlikely to tide over the broader challenges any time soon due to the coronavirus crisis. Nonetheless, it would be wise to bet on a few foreign bank stocks with stellar earnings outlook.

We are presenting five stocks with a Zacks Rank #2 (Buy) that investors may consider betting on.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)


5 Foreign Banks to Bet on

Bank of N.T. Butterfield Son Limited (NTB - Free Report) : Shares of this Hamilton, Bermuda-based bank have gained 16.1% in three months’ time. The Zacks Consensus Estimate for the 2020 EPS has been revised 5% upward, in the last 60 days.


Price and Consensus: NTB


Credit Suisse Group (CS - Free Report) : Shares of this Zurich, Switzerland-based bank appreciated 30.9% in the past three months. The consensus EPS estimate for the current year climbed 32.1%, over the past 60 days.

 

Price and Consensus: CS

 

UBS Group AG (UBS - Free Report) : The ongoing-year consensus EPS estimate for this Zurich, Switzerland-based bank moved 16.5% north, in 60 days’ time. The stock has rallied 23%, over the past three months.


Price and Consensus: UBS


Mizuho Financial Group, Inc. (MFG - Free Report) : The stock of this Tokyo, Japan-based bank has appreciated 11.4% in the past three months. The consensus EPS estimate for the current fiscal year has moved 27.3% upward in the last 60 days.

Price and Consensus: MFG

 

Erste Group Bank AG (EBKDY - Free Report) : Shares of this Vienna, Austria-based bank have gained 12.8% in three months’ time. The Zacks Consensus Estimate for the ongoing year’s EPS has been revised 4.5% upward, in the last 60 days.

Price and Consensus: EBKDY


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