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Near-Term Outlook Looks Gloomy for Foreign Bank Stocks

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The Zacks Foreign Banks Industry consists of overseas banks that also have operations in the United States. Since a foreign banking organization may 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 prevalent trade conflicts might affect overseas banking transactions. The long-overdue U.S.-China trade deal has shattered business confidence, looming over corporate earnings and global growth. However, monetary-policy normalization induced by some central banks across the globe may keep the momentum alive in the foreign banking space.
     
  • Near-term growth prospects of foreign banks are being called into question due to the weak recovery witnessed by banks in developed nations (except the United States) and persistent troubles faced by the financial firms in some of the emerging economies. Monetary-policy normalization varies across nations, with the developed ones — which are homes to a number of major foreign banks — specifically lagging. The central banks of these economies are yet to take interest rates to a level that could benefit their commercial banks.
     
  • While central banks in some nations are gearing up to hike interest rates, this might act against the sustainable economic growth the world has been witnessing. And any sluggishness in global economic growth might dampen the prospects for rising banking activities. Notably, the European Central Bank (ECB) has pushed the timing of the first hike in interest rates since the 2008 financial crisis to the end of the next year. Additionally, the central bank kept the Eurozone’s current growth forecast for 2019 unchanged at 1.2% in July, while slashing it slightly to 1.4% for 2020. These apart, 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 #160, which places it at the bottom 37% 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 November 2018, the industry’s earnings estimate for the current year has been revised 10.3% 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 two years.

While the stocks in this industry have collectively depreciated 15.2%, the Zacks S&P 500 composite and Zacks Finance Sector have gained 19% and 2.6%, respectively.


Two-Year Price Performance



 

Industry’s 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 1.04X. When compared with the highest level of 2.08X and median level of 1.68X 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 11.14X and the median level is 9.04X.



Price-to-Tangible Book Ratio (TTM)



As finance stocks typically have a lower P/TBV ratio, comparing foreign banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its border sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/TBV of 2.18X 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)


Bottom Line

While the developed nations (except the United States) are yet to make the backdrop favorable for their banks, nothing similar is anticipated from the emerging economies any time soon. In fact, a stronger dollar, partly offset by falling U.S. Treasury yields, has been putting pressure on some of the emerging economies, with the likelihood to spread across the others too.

The industry might not be able to tide over the broader challenges in the near future. Thus, it may not be a good idea to bet on this space right now. Nonetheless, it could be wise to bet on a few foreign bank stocks with stellar earnings outlook.

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and 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 stocks here.)

KB Financial Group Inc (KB - Free Report) : Shares of this South Korea-based bank have gained 20.8% in three months’ time. The Zacks Consensus Estimate for the 2019 EPS has moved up 4.4%, in the last 60 days. Currently, the stock sports a Zacks Rank #1.

Price and Consensus: KB


Banco Latinoamericano de Comercio Exterior, S.A. (BLX - Free Report) : Shares of this Panama City, the Republic of Panama-based bank appreciated 16.3% in the past three months. The consensus EPS estimate for the current year climbed 1.4%, over the last 60 days. The stock holds a Zacks Rank of 2, at present.

Price and Consensus: BLX


Barclays PLC (BCS - Free Report) : The consensus EPS estimate for this London-based bank moved 4.5% upward for the ongoing year, in 60 days’ time. The stock has rallied 27.1%, over the past three months. The stock holds a Zacks Rank of 2, at present.

Price and Consensus: BCS


UBS Group AG (UBS - Free Report) : The stock of this Zurich, Switzerland-based bank has appreciated 13.3% in the past three months. The consensus EPS estimate for the current year has moved 1.6% north in the last 60 days. The stock carries a Zacks Rank #2, currently.

Price and Consensus: UBS


HDFC Bank Limited (HDB - Free Report) : Shares of this India-based bank have gained 17.2% in three months’ time. The Zacks Consensus Estimate for the ongoing fiscal-year EPS has been revised 6.1% upward over the last 60 days. The stock currently holds a Zacks Rank of 2.
 

Price and Consensus: HDB



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