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 country. 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:
- Escalating economic uncertainties stemming from the coronavirus crisis might affect overseas banking transactions further. 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 are expected to further impact foreign banking activities.
- Near-term growth prospects of foreign banks are being called into question due to the weak recovery expected by banks in developed nations and the prevalent troubles faced by the financial firms in most emerging economies due to the outbreak. Amid the current turbulence, monetary-policy normalization varies across nations, with the developed ones — which are homes to a number of major foreign banks — being on the rise but might not be supportive for foreign banking operations.
- Sluggishness in global economic growth might dampen the prospects for rising banking activities. Further, 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 60-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #207, which places it at the bottom 19% 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 continued 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 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 May 2019, the industry’s earnings estimate for the current year has been revised 17.5% 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 the stocks in this industry have collectively depreciated 39.1%, the Zacks S&P 500 composite and Zacks Finance Sector have lost around 10.2% and 23.1%, respectively.
One-Year Price Performance
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 0.87X. When compared with the highest level of 2.09X and median level of 1.67X 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 9.76X and the median level is 9.15X.
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 2.30X and the median level of 3.46X for the same period are way above the Zacks Foreign Banks Industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
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 due to the coronavirus crisis in the near future. Nonetheless, it would be wise to bet on a few foreign bank stocks with stellar earnings outlook.
We are presenting four 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.)
4 Foreign Banks to Bet on
KB Financial Group Inc (KB - Free Report) : Shares of this South Korea-based bank have lost 38.6% in three months’ time. The Zacks Consensus Estimate for the 2020 EPS has remained unchanged, in the last 30 days.
Price and Consensus: KB
Macro Bank Inc. (BMA - Free Report) : Shares of this Buenos Aires, Argentina-based bank depreciated 53.4% in the past three months. The consensus EPS estimate for the current year climbed around 1%, over the past 30 days.
Price and Consensus: BMA
BBVA Banco Frances S.A. (BBAR - Free Report) : The ongoing-year consensus EPS estimate for this Buenos Aires, the Republic of Argentina-based bank moved 8.8% north, in 30 days’ time. The stock has plummeted 52%, over the past three months.
Price and Consensus: BBAR
Shinhan Financial Group Co Ltd (SHG - Free Report) : The stock of this Seoul, South Korea-based bank has depreciated 41.1% in the past three months. The consensus EPS estimate for this year has remained unrevised in the last 30 days.
Price and Consensus: SHG