The Zacks Foreign Banks Industry will benefit from higher rates as central banks across the globe are expected to hike interest rates to combat inflation. Thus, rising interest rates along with gradual rise in demand for loans will support revenue growth for industry players like UBS Group AG UBS, Banco Santander, S.A. SAN and Bancolombia S.A. CIB.
While the banks’ restructuring initiatives to focus more on core operations will be fruitful in the long run, they have resulted in higher costs. Also, the uneven economic recovery in the developed and emerging nations has been hampering foreign banks’ revenue growth.
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 and retail services, along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Bank Industry Trends to Watch
Rate Hike Expectations Likely to Provide Support: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe had reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it has been eroding banks’ profitability to a great extent. The pace of economic recovery also remains uneven in the developed (home to a number of major foreign banks) and emerging nations, which has been hampering banking operations globally. Nevertheless, there have been indications from many central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of England, about aggressive interest rate hikes in 2022 to counter rising inflation. Thus, a hike in rates is expected to help raise net interest income and margins of banks, thereby supporting top-line growth.
Restructuring Efforts Likely to Result in Higher Expenses: Several foreign banks have been engaging in business restructuring efforts. Many banks have been divesting/closing non-core operations in an effort to increase focus on core businesses and regions. While the restructuring efforts are expected to aid growth in the long run, these have been leading to a rise in costs in the near term. Along with this, increased costs related to technology upgrades might hamper banks’ bottom-line growth to some extent.
Uneven Global Economic Recovery Might be a Headwind: Since the coronavirus outbreak in the middle of March 2020, business confidence has been shattered across the globe as the pandemic loomed over corporate earnings and economic growth. While the record pace of vaccine coverage globally aided economic recovery to some extent during most of last year, the emergence of newer strains of the virus in different parts of the world might slow down economic growth in those regions. Banks’ performances are directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks’ financials to an extent in the near term.
Zacks Industry Rank Indicates Bright 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 #91, which places it in the top 36% 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 outperformance 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 top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s bottom-line growth potential. The industry’s 2022 earnings estimates have been revised 5.7% higher since May 2021-end.
Thus, before presenting a few stocks that you may want to consider for your portfolio, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Zacks Foreign Banks Industry has outperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 46.9%. The S&P 500 composite has rallied 32.1%, and the Zacks Finance Sector has appreciated 33.6%.
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 1.55X. When compared with the highest level of 2.09X over the past five years, there is a decent upside left. Notably, the current value compares with the median value of 1.59X.
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 14.75X.
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 4.16X and the median level of 3.76X for the same period are above the Zacks Foreign Banks Industry’s ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks to Bet on
UBS: Headquartered in Zurich, the company’s business strategy is centered on pre-eminent global wealth-management businesses and a universal bank in Switzerland, along with a global asset-management business and investment bank. UBS’s 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.
While the company expects a 2% increase in costs in 2022, it remains on track to improve cost efficiency and cost management. The company was able to deliver $200 million of gross savings in 2021 and is on track to deliver $1 billion of gross cost savings per annum by 2023. The cost-to-income ratio has also been gradually declining.
Currently, UBS sports a Zacks Rank #1 (Strong Buy). The stock has rallied 15.5% on the NYSE over the past year. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 10.1% upward over the past 60 days. Its 2023 earnings estimates have been revised 5.9% upward.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: UBS
Banco Santander: Headquartered in Madrid, Spain, this Zacks Rank #2 (Buy) company provides various retail and commercial banking products and services to individuals, small and medium-sized enterprises, and large companies worldwide.
The company has a diversified geographical footprint, which is well-balanced between emerging and developed markets. Also, it remains committed to increasing the customer base. Over the last seven years, SAN increased its number of customers. In first-quarter 2022, it increased its customer base by 7 million.
In line with its strategy to deploy capital to the most profitable businesses, SAN completed the acquisition of SC USA minority interests in the United States in the first-quarter 2022. Also, the acquisition of Amherst Pierpont has been completed.
The company maintains disciplined cost management. This has enabled it to maintain one of the best efficiency ratios in the sector, with an efficiency ratio of 45% in first-quarter 2022.
Shares of the company have lost 24.7% over the past year on the NYSE. The Zacks Consensus Estimate for the company’s 2022 and 2023 earnings has moved up 3.6% and 7.8%, respectively, in the past 60 days.
Price and Consensus: SAN
Bancolombia: Being one of the biggest Colombian financial institutions, the company provides banking products and services to individuals and corporate customers. CIB 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.
Bancolombia continues with its efforts to diversify and innovate its product portfolio. Despite the ongoing global supply-chain disruptions and inflationary pressures, high commodity prices are expected to support growth of the company’s investments and exports.
Similar to the previous quarters, CIB witnessed growth in loan balances across all geographies in the first quarter of 2022. Originations maintain an encouraging trend not only in commercial loans but also in retail and home-lending. Given the higher interest rates, driven by the current contractionary monetary policy in Colombia, CIB is expected to continue to witness an increase in interest income in the coming quarters, thus aiding top-line growth.
The Zacks Consensus Estimate for the company’s 2022 earnings has increased 19.6% over the past 60 days. Earnings estimates for 2023 have been revised 15.9% upward for the same period. Shares of CIB have gained 30.1% on the NYSE over the past year. The company currently sports a Zacks Rank #1.
Price and Consensus: CIB
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