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3 Foreign Bank Stocks to Consider Amid Industry Challenges
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The Zacks Foreign Banks Industry is bearing the brunt of the low interest rate environment. The impressive vaccination drives carried out across the globe to combat the coronavirus health crisis have resulted in the economy recovering gradually. However, the recovery will likely be uneven in the developed and emerging nations, which is expected to make the backdrop unfavorable for banks.
However, the gradual easing of regulations will likely support the industry. Thus, some of the industry players, including UBS Group AG (UBS - Free Report) , Deutsche Bank Aktiengesellschaft (DB - Free Report) and Bancolombia S.A. (CIB - Free Report) , are expected to benefit.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks, which have operations in the United States as well. Since a foreign banking organization might have both 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, these financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of wholesale as well as retail services along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Banks Industry Trends to Watch
Vaccination-Induced Economic Recovery to Provide Some Support: Since the coronavirus outbreak in mid-March 2020, business confidence was shattered as the pandemic loomed over corporate earnings and global growth. However, with the current steady pace in vaccination coverage globally, the trend has been reversing, thus, aiding economic recovery. As banks’ performance is directly linked to the performance of the overall economy, this has been providing support. However, while the current vaccines are said to be effective in combating the health crisis, the emergence of newer strains of the virus (that has already been witnessed in some parts of the globe) may slow down the pace of economic growth globally, thus, hurting banks’ financials to some extent.
Low Interest Rates to Continue Weighing on Performance: In an effort to cushion the economies from the coronavirus-induced economic slowdown, central banks across the globe reduced interest rates last year. While the effort aided economic growth to some extent, it has been eroding banks’ profitability. Notably, as economic recovery is likely to be uneven in the developed nations (which are homes to a number of major foreign banks) and the emerging economies; a major change in the interest-rate scenario toward the positive side is less likely in the near term. Therefore, foreign banking operations are expected to continue to be hampered to some extent.
Easing Regulations Likely to Provide Some Respite: Foreign banks in the United States have been trying to push the central bank to get some regulatory relief in terms of capital requirements, which are perceived to be too high for carrying out operations profitably. Therefore, ease in regulations under the current regime will likely aid foreign banking operations.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Foreign Banks Industry is a 64-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #175, which places it at the bottom 31% 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 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.
Thus, despite the near-term challenging prospects, we are presenting a few stocks that you may want to consider for your portfolio. But before that, let’s check out 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 sector in the past two years.
Stocks in the industry have collectively gained 10.3%. The S&P 500 composite has gained 59.4%, and the Zacks Finance Sector has appreciated 30.9%.
Two-Year Price Performance
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 1.57X. When compared with the highest level of 2.12X and median level of 1.66X over the past five years, there is decent upside left.
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 17.16X.
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 4.44X and the median level of 3.66X for the same period are above the Zacks Foreign Banks Industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks to Keep a Close Eye on
UBS: Headquartered in Zurich, the company’s business strategy is centered on pre-eminent global wealth-management businesses and universal bank in Switzerland along with global asset-management business and investment bank. Its efficiency programs will likely free up resources to make investments to support growth and enable it to serve clients with greater dexterity, improving quality and speed to market.
Over the years, UBS has been fortifying its footprint in various areas by undertaking partnerships with other firms, and maintaining cost discipline and capital-deployment activities.
The Zacks Rank #2 (Buy) stock has rallied 18.5% on the NYSE so far this year. The Zacks Consensus Estimate for its 2021 earnings has increased 11.7% over the past 60 days.
Price and Consensus: UBS
Deutsche Bank: Headquartered in Frankfurt am Main, Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in Europe (as measured by total assets). The company has been constantly making efforts to improve its financials by offloading unprofitable businesses. Its investments in growth areas and cost-control measures are commendable. The bank is focused on achieving a cost/income ratio of 70% by 2022. With the help of cost-saving efforts, it seeks to counter-balance higher regulatory costs.
The Zacks Rank #2 stock has appreciated 14.2% so far this year on the NYSE. The Zacks Consensus Estimate for the company’s 2021 earnings has moved up 29.3% in the past 60 days.
Price and Consensus: DB
Bancolombia: Based in Colombia, the company provides banking products and services to individuals and corporate customers. It offers checking and savings accounts, fixed-term deposits, investment products, financial support to real estate developers, mortgages for individuals and companies, and financial and operating leasing services among others.
The Zacks Consensus Estimate for its current-year earnings has moved 77% upward over the past 60 days. The company currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have lost 18.1% on the NYSE so far this year.
Image: Bigstock
3 Foreign Bank Stocks to Consider Amid Industry Challenges
The Zacks Foreign Banks Industry is bearing the brunt of the low interest rate environment. The impressive vaccination drives carried out across the globe to combat the coronavirus health crisis have resulted in the economy recovering gradually. However, the recovery will likely be uneven in the developed and emerging nations, which is expected to make the backdrop unfavorable for banks.
However, the gradual easing of regulations will likely support the industry. Thus, some of the industry players, including UBS Group AG (UBS - Free Report) , Deutsche Bank Aktiengesellschaft (DB - Free Report) and Bancolombia S.A. (CIB - Free Report) , are expected to benefit.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks, which have operations in the United States as well. Since a foreign banking organization might have both 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, these financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of wholesale as well as retail services along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Banks Industry Trends to Watch
Vaccination-Induced Economic Recovery to Provide Some Support: Since the coronavirus outbreak in mid-March 2020, business confidence was shattered as the pandemic loomed over corporate earnings and global growth. However, with the current steady pace in vaccination coverage globally, the trend has been reversing, thus, aiding economic recovery. As banks’ performance is directly linked to the performance of the overall economy, this has been providing support. However, while the current vaccines are said to be effective in combating the health crisis, the emergence of newer strains of the virus (that has already been witnessed in some parts of the globe) may slow down the pace of economic growth globally, thus, hurting banks’ financials to some extent.
Low Interest Rates to Continue Weighing on Performance: In an effort to cushion the economies from the coronavirus-induced economic slowdown, central banks across the globe reduced interest rates last year. While the effort aided economic growth to some extent, it has been eroding banks’ profitability. Notably, as economic recovery is likely to be uneven in the developed nations (which are homes to a number of major foreign banks) and the emerging economies; a major change in the interest-rate scenario toward the positive side is less likely in the near term. Therefore, foreign banking operations are expected to continue to be hampered to some extent.
Easing Regulations Likely to Provide Some Respite: Foreign banks in the United States have been trying to push the central bank to get some regulatory relief in terms of capital requirements, which are perceived to be too high for carrying out operations profitably. Therefore, ease in regulations under the current regime will likely aid foreign banking operations.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Foreign Banks Industry is a 64-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #175, which places it at the bottom 31% 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 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.
Thus, despite the near-term challenging prospects, we are presenting a few stocks that you may want to consider for your portfolio. But before that, let’s check out 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 sector in the past two years.
Stocks in the industry have collectively gained 10.3%. The S&P 500 composite has gained 59.4%, and the Zacks Finance Sector has appreciated 30.9%.
Two-Year Price Performance
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 1.57X. When compared with the highest level of 2.12X and median level of 1.66X over the past five years, there is decent upside left.
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 17.16X.
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 4.44X and the median level of 3.66X for the same period are above the Zacks Foreign Banks Industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks to Keep a Close Eye on
UBS: Headquartered in Zurich, the company’s business strategy is centered on pre-eminent global wealth-management businesses and universal bank in Switzerland along with global asset-management business and investment bank. Its efficiency programs will likely free up resources to make investments to support growth and enable it to serve clients with greater dexterity, improving quality and speed to market.
Over the years, UBS has been fortifying its footprint in various areas by undertaking partnerships with other firms, and maintaining cost discipline and capital-deployment activities.
The Zacks Rank #2 (Buy) stock has rallied 18.5% on the NYSE so far this year. The Zacks Consensus Estimate for its 2021 earnings has increased 11.7% over the past 60 days.
Price and Consensus: UBS
Deutsche Bank: Headquartered in Frankfurt am Main, Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in Europe (as measured by total assets). The company has been constantly making efforts to improve its financials by offloading unprofitable businesses. Its investments in growth areas and cost-control measures are commendable. The bank is focused on achieving a cost/income ratio of 70% by 2022. With the help of cost-saving efforts, it seeks to counter-balance higher regulatory costs.
The Zacks Rank #2 stock has appreciated 14.2% so far this year on the NYSE. The Zacks Consensus Estimate for the company’s 2021 earnings has moved up 29.3% in the past 60 days.
Price and Consensus: DB
Bancolombia: Based in Colombia, the company provides banking products and services to individuals and corporate customers. It offers checking and savings accounts, fixed-term deposits, investment products, financial support to real estate developers, mortgages for individuals and companies, and financial and operating leasing services among others.
The Zacks Consensus Estimate for its current-year earnings has moved 77% upward over the past 60 days. The company currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have lost 18.1% on the NYSE so far this year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: CIB