For Immediate Release
Chicago, IL – July 11, 2012 – Today, Zacks Equity Research discusses the U.S. Foreign Banks, including Barclays plc (BCS), Credit Suisse Group (CS), HSBC Holdings plc (HBC), Deutsche Bank AG (DB) and UBS AG (UBS).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
Though the growth potential of some non-U.S. banks could be restrained due to higher reserve requirements and outsized losses related to capital markets, strict lending limits as part of the regulatory overhaul as well as greater transparency in regulations could strengthen the fundamentals of many banks. Eventually, these are expected to create a less risky lane for the overall industry.
As inter-country investment walls have fallen, some large non-U.S. banks are freely expanding beyond their domestic boundaries through mergers and acquisitions. On the other hand, regulatory pressure to focus more on the home market is forcing some global banking giants to sell overseas assets. These banks are naturally trying hard to restructure operations and address funding needs.
In fact, the sector saw a moderate recovery in 2010, but performance in 2011 was one of the poorest in its history. Difficulties notwithstanding, the financial crisis is finally behind us.
Now the primary headwind for global banks is regulatory pressure, which ensued from taxpayers' money and government intervention that banks have relied on in order to remain in business. Moreover, government efforts to alleviate industry concerns have significantly raised political hurdles over time.
Politics will continue to influence lending decisions of banks for as long as these remain financially dependent on governments. According to banking regulators, if governments withdraw their support from banks before giving them sufficient time to restore their financial strength, the sector could collapse again. The need for bailouts is still felt prominently by the European banks.
The industry has been adopting tougher regulatory measures to prevent the recurrence of a global financial crisis and restore public confidence. In June 2011, the oversight body of the Basel Committee on Banking Supervision proposed new rules that would force the world's biggest banks to hold extra capital on their balance sheets as protection and prevention against any financial catastrophe. This extra capital requirement is an added cushion to the set of minimum capital standards under Basel III.
With these regulatory measures, the individual capital structures of banks will remain under constant pressure. The resulting slowdown at some big banks could be seen as a blessing in disguise, as it would eventually make their balance sheets more recession-proof.
Valuations Look Attractive
Balance sheet repair and credit environment recovery will make the valuations of some non-U.S. banks attractive. Particularly, valuations of the mega banks, which could comfortably maintain the minimum capital norms mandated by the Basel Committee, will experience the fastest valuation upside. Consequently, we believe this would be a good time for long-term investors to consider foreign bank stocks, as now the valuations look comparatively cheaper.
Investors with short-term targets, however, should be watchful while choosing foreign bank stocks at this point as near-term fundamentals remain weak. Asset quality lacks the potential to rebound anytime soon as default rates for individuals and companies are not expected to materially subside, and revenue growth might remain weak with faltering loan growth.
The sector is not expected to witness a turnaround at least in 2012. If any improvement occurs, it will vary from country to country, depending on industry circumstances.
Ratings downgrades are a major threat for major global banks. In July 2012, Moody’s Investors Service downgraded credit ratings of 15 systematically important banks in the U.S., U.K. and Europe. The foreign banks include the likes of Barclays plc (BCS), Credit Suisse Group (CS), HSBC Holdings plc (HBC), Deutsche Bank AG (DB) and UBS AG (UBS).
The downgrade was based on the agency’s concern related to these banks’ significant exposure to the volatility and expected losses from capital market activities. This rating action could compel many of these banks to post billions in additional collateral, which will make derivative trading costly. Also, already-high borrowing costs for these banks will create a further increase.
European banks are most likely to underperform in the upcoming quarters, primarily due the ongoing debt crisis in the region, resulting capital pressure and deleveraging risk.
In early 2010, the debt crisis originating in the Greek economy shook the stability of the European Union's (EU) monetary policies. Starting as a solvency crisis in a single country, the turmoil spread over to the entire Eurozone.
The situation did not stabilize to a great extent in 2011, despite financial assurance from EU leaders. In 2012, the European debt crisis has heightened, spreading fears of a financial collapse on the continent.
Though the funding situation in Europe has improved to some extent with huge aid from the European Central Bank, there remain deep concerns related to the banks’ ability to meet capital requirements.
Italy and Spain showed signs of improvement with support from the government and European Central Bank, but conditions in Greece remain uncertain due to issues related to additional bailout funds.
Moreover, the high inflation rate will continue to force regulators to tighten their policies in the Eurozone, making banks less flexible.
Overall, the European Union is trying hard not just to restore investor confidence but also the health of the continent’s banking system. The issue, however, remains far from being addressed.
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