Zacks Industry Outlook Highlights Mitsubishi UFJ Financial, ICICI Bank and UBS Group
For Immediate Release
Chicago, IL – November 3, 2023 – Today, Zacks Equity Research discusses Mitsubishi UFJ Financial Group, Inc. MUFG, ICICI Bank Ltd. IBN and UBS Group AG UBS.
Industry: Foreign Banks
Link: https://www.zacks.com/commentary/2176992/3-foreign-bank-stocks-on-the-radar-despite-industry-challenges
Banks across the globe have been undertaking restructuring efforts to focus more on core operations. While these efforts will be fruitful in the long run, they have resulted in higher costs, hurting banks' bottom-line growth. Moreover, the uneven economic recovery in developed and emerging nations is expected to hurt revenue growth for the companies within the Zacks Foreign Banks Industry.
Despite the above-mentioned challenges and other geopolitical concerns, industry players like Mitsubishi UFJ Financial Group, Inc., ICICI Bank Ltd. and UBS Group AG are well-poised to benefit amid the high interest rate environment.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization may have federal 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.
The 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, and conduct money-market transactions for their parent organizations. Some firms are involved in developing only specialized services.
3 Foreign Bank Industry Trends to Watch
Restructuring Efforts Likely to Keep Costs Elevated: Several foreign banks are undertaking business restructuring efforts. Many banks have been divesting/closing non-core operations to increase focus on core businesses and regions. While restructuring efforts are expected to boost growth in the long run, these have been leading to higher expenses. Increased costs related to technology upgrades are likely to keep hampering banks' bottom-line growth to some extent in the near term.
Uneven Global Economic Recovery Poses a Concern: After the coronavirus outbreak, business confidence was shattered across the globe as the pandemic loomed over corporate earnings and economic growth. While the economy has recovered from the negative impacts of the pandemic in most parts of the world, growth has slowed in some regions because of certain other geopolitical concerns. Banks' performances are directly linked to the performance of the overall economy. Thus, uneven economic growth may hurt banks' finances to an extent in the upcoming period.
Higher Interest Rates Likely to Aid Top-Line Growth: The efforts undertaken by the central banks across the globe to cushion economies from the pandemic-induced economic slowdown in 2020 (reducing benchmark interest rates to record lows) were successful in aiding immediate economic growth. However, it eroded banks' profitability to a great extent.
The pace of economic recovery, which is uneven in the developed (home to a number of major foreign banks) and emerging nations, hampered banking operations globally. Nevertheless, almost all central banks across the globe have raised interest rates since the beginning of 2022 to counter inflation, which has supported banks' top-line growth. Banks are expected to continue to witness growth in net interest income and margins in the higher interest rate environment.
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 #188, which places it in the bottom 25% 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 outperform 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 a dismal earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in the group's bottom-line growth potential. The industry's most recent 2023 earnings estimates have been revised 2.2% lower since September 2023-end.
Despite the near-term challenges, we present a few stocks that you may want to keep an eye on. But before that, let us check out the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 and the Finance 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 lost 6.8%. The S&P 500 composite has lost 11.2% and the Zacks Finance Sector has depreciated 16.6%.
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 1.62X. When compared with the highest level of 1.90X over the past five years, there is a slight upside left. Notably, the current value compares with the median value of 1.59X.
Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 9.58X.
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. However, 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 4.06X and the median level of 4.12X for the same period are above the Zacks Foreign Banks Industry's ratios.
3 Foreign Banks Worth a Watch
Mitsubishi UFJ: Headquartered in Tokyo, Japan, this Zacks Rank #2 (Buy) company is the world's leading bank-holding company that operates under an integrated business group system.
Over the last several years, MUFG has been expanding inorganically. The company continues to pursue global growth opportunities. In August 2023, MUFG Bank, a core banking subsidiary of MUFJ, acquired 24 million shares of U.S. Bancorp's common stock for $936 million. The move was part of a debt-to-equity conversion and will help U.S. Bancorp meet its repayment obligation to Mitsubishi UFJ, as agreed upon during the acquisition of MUFG Union Bank N.A.'s core regional banking franchise on Dec 1, 2022.
In June 2023, MUFG, through MUFG Bank and PT Adira Dinamika Multi Finance Tbk, announced the acquisition of 80.6% shares in PT Mandala Multifinance Tbk to expand its auto loan business in Indonesia. In November 2022, MUFG announced plans to acquire respective 100% and 80% stakes in Home Credit B.V.'s units — HC Consumer Finance Philippines, Inc. and PT Home Credit Indonesia.
With these acquisitions, the bank seeks to expand its retail business in Asia. Also, it remains focused on its updated medium-term business plan (2021 to 2023) that includes the upgradation and reformation of its business model, and the exploration of new business areas.
MUFG's capital strength favors flexible share repurchases. Since May 2017, the company has completed several share repurchase programs that have enhanced shareholder value and facilitated flexible capital policy implementations in response to changes in the business environment.
The company's deposits (its primary source of liquidity) have witnessed a compound annual growth rate (CAGR) of 1.8% during the five-year period (ended March 2023) owing to its broad customer base in Japan and depositors' preference to seek safety of deposits at large financial institutions.
Shares of MUFG have gained 40.9% on the NYSE in the past six months. The Zacks Consensus Estimate for the company's current fiscal-year earnings has moved up 2.6% in the past 60 days. The estimate implies a year-over-year rise of 129.4%.
ICICI Bank: Headquartered in Mumbai, India, the company provides a wide range of banking products and financial services to corporate and retail customers.
ICICI Bank has made commendable progress in improving its digital banking services for retail and corporate clients. The bank has been striving to provide superior end-to-end seamless digital services, personalized solutions, and value-added features to further enable data-driven cross-sell and up-sell opportunities.
The increasing adoption of the bank's mobile banking app — iMobile Pay — is helping garner a solid market share. Also, the company's digital platform for businesses — InstaBIZ — along with supply-chain platforms, has witnessed tremendous growth in the past few quarters. These efforts are leading to a rapid increase in end-to-end digital sanctions and disbursements across various products.
Moreover, IBN has been successfully leveraging its technological initiatives to augment the contribution of non-interest income toward its top line. In the first half of fiscal 2024 (ended Sep 30), almost 36% of the company's mortgage loan sanctions and 30% of its personal loan disbursements by volume were end-to-end digital. Driven by these efforts, non-interest income continues to improve. IBN's efforts to digitize operations and a rise in mobile banking transactions will likely continue to help the company garner more fee income, going forward.
Further, while ICICI Bank has wide international loan coverage, domestic loans represent a substantial part of its overall loans (97% as of Sep 30, 2023). As a result, the company is secure with respect to loans and is less likely to be affected by global concerns.
Shares of the company have lost 1.2% on the NYSE in the past six months. The Zacks Consensus Estimate for the company's current fiscal-year earnings has moved up 1% in the past 60 days. The consensus estimate indicates a rise of 17% from the previous year's reported number. Currently, IBN carries a Zacks Rank #3 (Hold).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
UBS: Headquartered in Zurich, Switzerland, UBS is the holding company of UBS Group. In 2014, management established UBS Group, in line with several measures taken to significantly improve the resolvability of UBS Group in response to heightened issues surrounding "too-big-to-fail" regulatory requirements.
Over the years, UBS has fortified its footprint in various areas and expanded its operations by undertaking partnerships with other firms. In June 2023, it completed the acquisition of Credit Suisse (a regulatory-assisted deal), which is expected to enhance capabilities in wealth and asset management, as well as augment the strategy of growing its capital-light businesses. UBS aims to substantially complete the integration process by 2026-end and achieve gross cost reductions of more than $10 billion.
Post the Credit Suisse acquisition, UBS expects to continue to be capitalized well above its common equity tier 1 (CET 1) capital ratio target and regulatory minimum capital requirements.
UBS' wealth management joint venture with Japan's Sumitomo Mitsui Trust Holdings (UBS SuMi TRUST Wealth Management Co.) and investment banking joint venture with Banco Do Brasil SA are likely to keep supporting its financials, going forward.
Moreover, UBS has been making efforts to become more digital and data-driven to provide clients with digital-first services. The company has established a leveling-up strategy based on five key pillars through Agile@UBS, quarterly business reviews and digital roadmaps, modern technology, automation, and engineering excellence. It is migrating toward a cloud-based application system, and is accelerating digitalization and facilitating connection with the financial industry ecosystem to provide better and faster client services.
These initiatives will help deliver a personalized, relevant, on-time and seamless client experience, thereby providing the company a competitive edge.
The Zacks Consensus Estimate for the company's 2023 earnings has been revised upward by 1.2% over the past 60 days. The estimate indicates a year-over-year decline of 62.2%. Shares of UBS have gained 24.2% on the NYSE in the past six months. The company currently carries a Zacks Rank of 2.
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Mitsubishi UFJ Financial Group, Inc. (MUFG) : Free Stock Analysis Report
