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3 Stocks to Consider 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. 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 gain from relatively high 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
High Interest Rate Environment 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 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 from 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 keep getting support amid the current high interest rate environment. Despite the fact that central banks across the globe have started with rate cuts, interest rates are likely to remain relatively high in the near term. 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 either been divesting or 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 #49, which places it in the top 20% 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 an impressive 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 growth potential. The industry’s most recent earnings estimates for 2024 have been revised 2.9% higher since the end of June 2024.
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 S&P 500 But Outperforms 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 52.5%. The S&P 500 composite has rallied 56.5% and the Zacks Finance Sector has appreciated 47.2%.
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 2.31X. This compares with the highest level of 2.34X, the lowest level of 0.79X and the median of 1.62X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 14.90X, which the chart below shows.
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 5.69X and the median level of 4.44X 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: Headquartered in London, it is a major global banking and financial services firm with $2.98 trillion in assets as of June 30, 2024.
The company has been 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, the company acquired Citigroup's retail wealth management business in China in June 2024, whereas it acquired Singapore-based SilkRoad Property Partners Group in January. 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 the transformation plan to reshape underperforming businesses, simplify complex organizations and reduce costs. The company realized gross savings of $5.6 billion, with cost to achieve a spend of $6.5 billion by 2022-end. HSBC expects to achieve additional cost savings this year, driven by the actions undertaken in 2023.
In April 2024, the company announced an agreement to divest its Argentina business, whereas in February, HSBC 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 16.9% on the NYSE in the past year. The Zacks Consensus Estimate for its current-year earnings has moved 2.7% higher in the past 60 days. Currently, HSBC carries a Zacks Rank #2 (Buy).
Barclays: Headquartered in London, this Zacks Ranked #3 (Hold) company is a major global banking and financial services firm with £1,576.6 billion ($1,993.5 billion) in total assets as of June 30, 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 it announced the disposal of its Italian mortgage portfolio (which was completed in the second quarter of 2024) in April. Additionally, the company has sold $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.
This February, the company announced a deal to acquire Tesco’s retail banking business. The move is expected to complement its existing business and strengthen its position in the market. In 2023, Barclays 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 half 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 be 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 the cost-to-income ratio in the high 50s.
BCS shares have gained 62.1% on the NYSE in the past 12 months. The Zacks Consensus Estimate for the company’s 2024 earnings has moved 1.2% higher in the past 60 days.
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 six months 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 half 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. For 2024 and 2025, the company plans to pay out dividends of 68 cents and €1 per share, respectively.
The company also has a share repurchase program. In July 2024, the bank completed the share repurchase program launched on March 4, 2024. Under this program, 46.4 million shares were repurchased for € 675 million, bringing cumulative shareholder distributions through dividends and share repurchases to € 3.3 billion since 2022. DB is committed to capital distributions of €8 billion over the financial years 2022-2026.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised 3.5% higher over the past 60 days. DB shares have gained 63.3% on the NYSE in the past year. The company currently carries a Zacks Rank of 3.
Price and Consensus: DB
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3 Stocks to Consider 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. 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 gain from relatively high 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
High Interest Rate Environment 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 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 from 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 keep getting support amid the current high interest rate environment. Despite the fact that central banks across the globe have started with rate cuts, interest rates are likely to remain relatively high in the near term. 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 either been divesting or 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 #49, which places it in the top 20% 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 an impressive 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 growth potential. The industry’s most recent earnings estimates for 2024 have been revised 2.9% higher since the end of June 2024.
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 S&P 500 But Outperforms 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 52.5%. The S&P 500 composite has rallied 56.5% and the Zacks Finance Sector has appreciated 47.2%.
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 2.31X. This compares with the highest level of 2.34X, the lowest level of 0.79X and the median of 1.62X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 14.90X, which the chart below shows.
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 5.69X and the median level of 4.44X 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: Headquartered in London, it is a major global banking and financial services firm with $2.98 trillion in assets as of June 30, 2024.
The company has been 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, the company acquired Citigroup's retail wealth management business in China in June 2024, whereas it acquired Singapore-based SilkRoad Property Partners Group in January. 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 the transformation plan to reshape underperforming businesses, simplify complex organizations and reduce costs. The company realized gross savings of $5.6 billion, with cost to achieve a spend of $6.5 billion by 2022-end. HSBC expects to achieve additional cost savings this year, driven by the actions undertaken in 2023.
In April 2024, the company announced an agreement to divest its Argentina business, whereas in February, HSBC 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 16.9% on the NYSE in the past year. The Zacks Consensus Estimate for its current-year earnings has moved 2.7% higher in the past 60 days. Currently, HSBC carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: HSBC
Barclays: Headquartered in London, this Zacks Ranked #3 (Hold) company is a major global banking and financial services firm with £1,576.6 billion ($1,993.5 billion) in total assets as of June 30, 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 it announced the disposal of its Italian mortgage portfolio (which was completed in the second quarter of 2024) in April. Additionally, the company has sold $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.
This February, the company announced a deal to acquire Tesco’s retail banking business. The move is expected to complement its existing business and strengthen its position in the market. In 2023, Barclays 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 half 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 be 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 the cost-to-income ratio in the high 50s.
BCS shares have gained 62.1% on the NYSE in the past 12 months. The Zacks Consensus Estimate for the company’s 2024 earnings has moved 1.2% higher in the past 60 days.
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 six months 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 half 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. For 2024 and 2025, the company plans to pay out dividends of 68 cents and €1 per share, respectively.
The company also has a share repurchase program. In July 2024, the bank completed the share repurchase program launched on March 4, 2024. Under this program, 46.4 million shares were repurchased for € 675 million, bringing cumulative shareholder distributions through dividends and share repurchases to € 3.3 billion since 2022. DB is committed to capital distributions of €8 billion over the financial years 2022-2026.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised 3.5% higher over the past 60 days. DB shares have gained 63.3% on the NYSE in the past year. The company currently carries a Zacks Rank of 3.