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The overall performance of foreign banks was impressive in the first half of 2017. The results from a number of giants impressed the market in terms of both beating the earnings estimates and showing a year-over-year improvement. The gradual strengthening of the global economy provided a major boost to the trading activities.

Increasing expectations of business-friendly reforms and lower borrowing costs will likely motivate a number of foreign banks to invest more in the coming quarters.

However, the persisting low interest-rate environment in the major economies, especially in the European Union and Japan, is taking a toll on their bank’s profitability. The recent elections in the United Kingdom have raised hopes for a softer Brexit, though uncertainty still prevails.

Buoyed by the positive factors, the Zacks Foreign Banks Industry has rallied 14.1% year to date compared with a 9.9% gain of the S&P 500.

A Look at the Fundamentals

The industry does not have an impressive earnings growth history. However, the long-term earnings per share growth is projected to be 11.4% and compares favorably with 9.6% for the S&P 500.

Moving on to the industry’s price-to-book (P/B) ratio, which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next, investors might want to pay some more premium. We find the Foreign Banks industry undervalued despite the outperformance.

The industry currently has a trailing 12-month P/B ratio of 1.48, which compares with 3.61 for the S&P 500.

Further, the broader Finance sector has a trailing 12-month P/B ratio of 2.33. Thus, when compared with the market at large and with the Finance sector, the industry seems undervalued.

Also, this view is confirmed by the group’s Zacks Industry Rank. This 70-company industry carries a Zacks Industry Rank of #20, which places it at the top 8% of 250 plus Zacks industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

5 Foreign Bank Stocks to Buy Now

Amid all the optimism regarding an improving backdrop, it might be the right time to consider the following stocks that have Zacks Rank #1 (Strong Buy) or 2 (Buy) and Value Score of A or B.  

Our research shows that stocks with this combination offer the best upside potential.

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

Deutsche Bank (DB - Free Report) : The stock has gained nearly 9% over the past year. The Zacks Consensus Estimate for the current year has been revised 9.8% upward over the last 60 days. This Germany-based lender has a Value Score of A and a Zacks Rank of 2.

Mitsubishi UFJ Financial Group, Inc. (MTU - Free Report) : Shares of Mitsubishi UFJ have gained 3.2% in a year’s time. This Japan-based bank has a Value Score of B along with a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year has been revised 7.4% upward over the last 60 days.

Shinhan Financial Group (SHG - Free Report) : Over the past year, shares of Shinhan have gained 24.7%. It has a Value Score of B and a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year has been revised 9.7% upward over the last 60 days.

Banco Santander Brasil S.A. (BSBR - Free Report) : Shares of Banco have gained 27.2% over the past year. The Brazil-based bank has a Value Score of B and a Zacks Rank of 2. Further, its Zacks Consensus Estimate for the current-year earnings has been revised 2.9% upward over the last 60 days.

Swedbank AB (SWDBY - Free Report) : The stock has gained nearly 19% over the past year. The Zacks Consensus Estimate for the current year has been revised 9.9% upward over the last 60 days. The Sweden-based company has a Value Score of B and sports a Zacks Rank of 1.

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