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3 Stocks Worth a Look From the Prospering Foreign Banks Industry
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Banks across the globe have been continuously undertaking restructuring efforts to focus more on core operations. While these efforts are expected to result in elevated expenses, they will aid growth in the long run. Moreover, while the uneven economic recovery in developed and emerging nations has been hurting revenue growth for companies within the Zacks Foreign Banks Industry, the current high interest rate environment will continue to provide support.
Thus, despite the geopolitical concerns, industry players like HSBC Holdings plc (HSBC - Free Report) , Barclays PLC (BCS - Free Report) and Deutsche Bank Aktiengesellschaft (DB - Free Report) are well-poised to benefit from higher interest rates.
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
The Current High-Interest-Rate Environment to Support 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 has been uneven in the developed (home to a number of major foreign banks) and emerging nations, also hampered banking operations globally. Nevertheless, almost all central banks across the globe began raising interest rates since the beginning of 2022 to counter inflation, which supported banks’ top-line growth. While higher deposit costs might continue to weigh on banks’ net interest income and margin growth to some extent, banks are expected to continue to get support amid the current high interest rate environment (which is likely to persist for some time now before rates begin to decline), along with a decent lending scenario. The efforts undertaken by most banks to diversify revenue sources to become less dependent on spread income will likely support non-interest income growth.
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 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, 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Foreign Banks Industry is a 66-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #42, which places it in the top 17% 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 a decent earnings outlook for the constituent companies in aggregate.
Thus, we present a few stocks from the industry 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 Underperforms the S&P 500 But Outperforms the Finance Sector
The Zacks Foreign Banks Industry has underperformed the S&P 500 but outperformed its sector in the past two years.
Stocks in the industry have collectively gained 37.4%. The S&P 500 composite has rallied 45.7% and the Zacks Finance Sector has appreciated 30.9%.
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 1.60X. When compared with the highest level of 1.92X over the past five years, there is a slight upside left. Notably, the current value is in line with the median value, which is also 1.60X.
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 15.15X.
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. 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 4.18X and the median level of 4.37X for the same period are above the Zacks Foreign Banks Industry’s ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks Worth a Look
HSBC Holdings: Headquartered in London, it is a major global banking and financial services firm, with $3 trillion in assets as of Mar 31, 2024.
The company remains committed to bolstering its performance with a special focus on building operations across Asia. It intends to position itself as a top bank for high-net-worth and ultra-high-net-worth clients in the region.
In sync with this, in June 2024, the company closed the deal to acquire Citigroup's retail wealth management business in China. Also, it is actively restructuring its operations in Germany to focus more on its growth strategy in Asia. Further, HSBC re-launched its private banking business in India as the country has been experiencing a surge in the number of super-rich.
In 2022, HSBC acquired 100% of the issued share capital of AXA Insurance in Singapore and L&T Investment Management Limited. These initiatives will likely help the company strengthen its position in the region, which constitutes more than half of its operations.
HSBC has been restructuring its operations to further improve operating efficiency. In 2020, it announced its transformation plan to reshape underperforming businesses, simplify complex organizations and reduce costs. It realized gross savings of $5.6 billion, with cost to achieve a spend of $6.5 billion by 2022-end. Moreover, it expects to achieve additional cost savings this year, driven by the actions undertaken in 2023.
In April 2024, HSBC announced an agreement to divest its Argentina business, while in February, it agreed to sell its Armenian unit. The company has already exited retail banking businesses in the United States, Canada, France, New Zealand, Greece and Russia.
HSBC’s brand, capital strength, extensive global network and positioning enable it to continuously attract and retain clients. The company’s product and service leadership in alternative investments, foreign exchange, credit, investment advice and many other cross-border banking services help it widen its customer base.
Shares of the company have gained 10.1% on the NYSE in the past year. The Zacks Consensus Estimate for its current-year earnings has moved 6.2% lower in the past 60 days. The consensus estimate indicates a rise of 0.5% from the previous year’s reported number. Currently, HSBC carries a Zacks Rank #3 (Hold).
Price and Consensus: HSBC
Barclays: Headquartered in London, this Zacks Ranked #3 company is a major global banking and financial services firm, with £1,577.1 billion ($1,990 billion) in total assets as of Mar 31, 2024.
Over the past few years, Barclays has been striving to simplify operations and focus on core businesses. As part of its business overhaul, the company announced changes to its operating divisions effective first-quarter 2024.
In July 2024, the company announced the divestiture of its German consumer finance business, while in April, it announced the disposal of its Italian mortgage portfolio. In February 2024, the company announced the sale of $1.1 billion in credit card receivables to Blackstone’s Credit & Insurance segment to bolster lending capacity for Barclays Bank Delaware in the United States.
In the same month, BCS announced a deal to acquire Tesco’s retail banking business, which is expected to complement its existing business and strengthen its position in the market. In 2023, it acquired Kensington Mortgage, which bolstered its mortgage business in the U.K. Driven by these initiatives, the company’s profitability is expected to improve over time.
Moreover, Barclays’ initiatives to improve efficiency over the past few years have been bearing fruit, as evident from a fall in expenses. While total operating expenses increased in 2022, 2023 and the first quarter of 2024, the metric declined, seeing a compound annual growth rate (CAGR) of 2.4% over the six years ended 2021. As BCS’ business restructuring initiatives continue to offer support, overall costs are expected to remain manageable.
Driven by the structural cost actions taken in 2023 and ongoing efficiency investments, expense savings of £1 billion are anticipated in 2024, with a payback of less than two years. By 2026, management expects total gross efficiency savings of £2 billion and cost-to-income ratio in the high 50s.
BCS shares have gained 42.8% on the NYSE in the past 12 months. The Zacks Consensus Estimate for the company’s 2024 earnings has moved marginally lower in the past 60 days. The estimate implies a year-over-year rise of 15.9%.
Price and Consensus: BCS
Deutsche Bank: Headquartered in Frankfurt am Main, this is the largest bank in Germany and one of the largest financial institutions in the world, as measured by total assets. It offers a wide variety of investment, financial, and related products and services.
Growth in net revenues has been a key strength at Deutsche Bank. The metric has seen a CAGR of 2.7% over the five years ended 2023, with the uptrend persisting in the first quarter of 2024. Notably, the bank’s efforts to shift focus from investment banking to more stable businesses, such as private bank, corporate bank and the asset management unit, will likely continue to aid revenues in the upcoming period.
The bank closed the acquisition of Numis, which is likely to aid the Asset Management segment. Management expects revenues to witness a CAGR of 5.5-6.5% for the period between 2021 and 2025.
Moreover, solid deposit balances support DB’s financials. The metric witnessed a CAGR of 2% over the five years ended 2023, with the uptrend continuing in the first quarter of 2024. The company benefits from its well-diversified deposit base across various client segments and regions. Also, its loan-to-deposit ratio reflects a strong and stable funding base. Thus, we believe that the stable deposit balance will strengthen the company’s balance sheet.
Deutsche Bank has been returning excess capital to shareholders through dividends and share buybacks. At its annual general meeting in May 2024, the bank proposed 2023 dividends of 45 cents per share, aggregating approximately €900 million. This indicates an increase from 30 cents per share paid out in 2022. Further, for 2024 and 2025, the company plans to pay dividends of 68 cents and €1 per share, respectively.
The company also has a share repurchase program authorizing it to buy back shares amounting to €675 million. The buyback authorization is 50% higher than the bank’s €450-million program completed in 2023. Such capital distributions are in line with management’s intention to return €8 billion to shareholders through 2022-2026.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised marginally lower over the past 60 days. The estimate indicates a year-over-year rise of 2.3%. DB shares have gained 59.7% on the NYSE in the past year. The company currently carries a Zacks Rank of 3.
Image: Shutterstock
3 Stocks Worth a Look From the Prospering Foreign Banks Industry
Banks across the globe have been continuously undertaking restructuring efforts to focus more on core operations. While these efforts are expected to result in elevated expenses, they will aid growth in the long run. Moreover, while the uneven economic recovery in developed and emerging nations has been hurting revenue growth for companies within the Zacks Foreign Banks Industry, the current high interest rate environment will continue to provide support.
Thus, despite the geopolitical concerns, industry players like HSBC Holdings plc (HSBC - Free Report) , Barclays PLC (BCS - Free Report) and Deutsche Bank Aktiengesellschaft (DB - Free Report) are well-poised to benefit from higher interest rates.
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
The Current High-Interest-Rate Environment to Support 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 has been uneven in the developed (home to a number of major foreign banks) and emerging nations, also hampered banking operations globally. Nevertheless, almost all central banks across the globe began raising interest rates since the beginning of 2022 to counter inflation, which supported banks’ top-line growth. While higher deposit costs might continue to weigh on banks’ net interest income and margin growth to some extent, banks are expected to continue to get support amid the current high interest rate environment (which is likely to persist for some time now before rates begin to decline), along with a decent lending scenario. The efforts undertaken by most banks to diversify revenue sources to become less dependent on spread income will likely support non-interest income growth.
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 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, 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Foreign Banks Industry is a 66-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #42, which places it in the top 17% 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 a decent earnings outlook for the constituent companies in aggregate.
Thus, we present a few stocks from the industry 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 Underperforms the S&P 500 But Outperforms the Finance Sector
The Zacks Foreign Banks Industry has underperformed the S&P 500 but outperformed its sector in the past two years.
Stocks in the industry have collectively gained 37.4%. The S&P 500 composite has rallied 45.7% and the Zacks Finance Sector has appreciated 30.9%.
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 1.60X. When compared with the highest level of 1.92X over the past five years, there is a slight upside left. Notably, the current value is in line with the median value, which is also 1.60X.
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 15.15X.
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. 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 4.18X and the median level of 4.37X for the same period are above the Zacks Foreign Banks Industry’s ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks Worth a Look
HSBC Holdings: Headquartered in London, it is a major global banking and financial services firm, with $3 trillion in assets as of Mar 31, 2024.
The company remains committed to bolstering its performance with a special focus on building operations across Asia. It intends to position itself as a top bank for high-net-worth and ultra-high-net-worth clients in the region.
In sync with this, in June 2024, the company closed the deal to acquire Citigroup's retail wealth management business in China. Also, it is actively restructuring its operations in Germany to focus more on its growth strategy in Asia. Further, HSBC re-launched its private banking business in India as the country has been experiencing a surge in the number of super-rich.
In 2022, HSBC acquired 100% of the issued share capital of AXA Insurance in Singapore and L&T Investment Management Limited. These initiatives will likely help the company strengthen its position in the region, which constitutes more than half of its operations.
HSBC has been restructuring its operations to further improve operating efficiency. In 2020, it announced its transformation plan to reshape underperforming businesses, simplify complex organizations and reduce costs. It realized gross savings of $5.6 billion, with cost to achieve a spend of $6.5 billion by 2022-end. Moreover, it expects to achieve additional cost savings this year, driven by the actions undertaken in 2023.
In April 2024, HSBC announced an agreement to divest its Argentina business, while in February, it agreed to sell its Armenian unit. The company has already exited retail banking businesses in the United States, Canada, France, New Zealand, Greece and Russia.
HSBC’s brand, capital strength, extensive global network and positioning enable it to continuously attract and retain clients. The company’s product and service leadership in alternative investments, foreign exchange, credit, investment advice and many other cross-border banking services help it widen its customer base.
Shares of the company have gained 10.1% on the NYSE in the past year. The Zacks Consensus Estimate for its current-year earnings has moved 6.2% lower in the past 60 days. The consensus estimate indicates a rise of 0.5% from the previous year’s reported number. Currently, HSBC carries a Zacks Rank #3 (Hold).
Price and Consensus: HSBC
Barclays: Headquartered in London, this Zacks Ranked #3 company is a major global banking and financial services firm, with £1,577.1 billion ($1,990 billion) in total assets as of Mar 31, 2024.
Over the past few years, Barclays has been striving to simplify operations and focus on core businesses. As part of its business overhaul, the company announced changes to its operating divisions effective first-quarter 2024.
In July 2024, the company announced the divestiture of its German consumer finance business, while in April, it announced the disposal of its Italian mortgage portfolio. In February 2024, the company announced the sale of $1.1 billion in credit card receivables to Blackstone’s Credit & Insurance segment to bolster lending capacity for Barclays Bank Delaware in the United States.
In the same month, BCS announced a deal to acquire Tesco’s retail banking business, which is expected to complement its existing business and strengthen its position in the market. In 2023, it acquired Kensington Mortgage, which bolstered its mortgage business in the U.K. Driven by these initiatives, the company’s profitability is expected to improve over time.
Moreover, Barclays’ initiatives to improve efficiency over the past few years have been bearing fruit, as evident from a fall in expenses. While total operating expenses increased in 2022, 2023 and the first quarter of 2024, the metric declined, seeing a compound annual growth rate (CAGR) of 2.4% over the six years ended 2021. As BCS’ business restructuring initiatives continue to offer support, overall costs are expected to remain manageable.
Driven by the structural cost actions taken in 2023 and ongoing efficiency investments, expense savings of £1 billion are anticipated in 2024, with a payback of less than two years. By 2026, management expects total gross efficiency savings of £2 billion and cost-to-income ratio in the high 50s.
BCS shares have gained 42.8% on the NYSE in the past 12 months. The Zacks Consensus Estimate for the company’s 2024 earnings has moved marginally lower in the past 60 days. The estimate implies a year-over-year rise of 15.9%.
Price and Consensus: BCS
Deutsche Bank: Headquartered in Frankfurt am Main, this is the largest bank in Germany and one of the largest financial institutions in the world, as measured by total assets. It offers a wide variety of investment, financial, and related products and services.
Growth in net revenues has been a key strength at Deutsche Bank. The metric has seen a CAGR of 2.7% over the five years ended 2023, with the uptrend persisting in the first quarter of 2024. Notably, the bank’s efforts to shift focus from investment banking to more stable businesses, such as private bank, corporate bank and the asset management unit, will likely continue to aid revenues in the upcoming period.
The bank closed the acquisition of Numis, which is likely to aid the Asset Management segment. Management expects revenues to witness a CAGR of 5.5-6.5% for the period between 2021 and 2025.
Moreover, solid deposit balances support DB’s financials. The metric witnessed a CAGR of 2% over the five years ended 2023, with the uptrend continuing in the first quarter of 2024. The company benefits from its well-diversified deposit base across various client segments and regions. Also, its loan-to-deposit ratio reflects a strong and stable funding base. Thus, we believe that the stable deposit balance will strengthen the company’s balance sheet.
Deutsche Bank has been returning excess capital to shareholders through dividends and share buybacks. At its annual general meeting in May 2024, the bank proposed 2023 dividends of 45 cents per share, aggregating approximately €900 million. This indicates an increase from 30 cents per share paid out in 2022. Further, for 2024 and 2025, the company plans to pay dividends of 68 cents and €1 per share, respectively.
The company also has a share repurchase program authorizing it to buy back shares amounting to €675 million. The buyback authorization is 50% higher than the bank’s €450-million program completed in 2023. Such capital distributions are in line with management’s intention to return €8 billion to shareholders through 2022-2026.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised marginally lower over the past 60 days. The estimate indicates a year-over-year rise of 2.3%. DB shares have gained 59.7% on the NYSE in the past year. The company currently carries a Zacks Rank of 3.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.