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The Zacks Foreign Banks Industry will continue to benefit from higher rates as central banks across the globe are expected to keep raising interest rates to combat inflation. Thus, rising interest rates, along with higher loan demand, will support revenue growth for industry players like HSBC Holdings plc, UBS Group AG, Barclays PLC and Deutsche Bank Aktiengesellschaft.
While banks’ restructuring initiatives to focus on core operations will be fruitful in the long run, they have resulted in higher costs. Also, uneven economic recovery in developed and emerging nations has been hampering foreign banks’ revenue growth.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization might 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.
Additionally, 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, 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
Higher Interest Rates Likely to Support Top-Line Growth: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it eroded 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. This has been hampering banking operations globally. Nevertheless, almost all central banks across the globe have been raising interest rates since the beginning of this year to counter rising inflation, thereby providing support to banks’ top-line growth.
In fact, almost all the central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of England, have indicated more hikes in the coming period. Thus, higher rates are expected to help raise the net interest income and margins of banks across the globe.
Restructuring Efforts Might Result in Higher Costs: Several foreign banks are engaging in 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 aid growth in the long run, these have been leading to a rise in costs. Increased costs related to technology upgrades might hamper banks’ bottom-line growth to some extent.
Uneven Global Economic Recovery Might Pose a Concern: After the coronavirus outbreak in mid-March 2020, business confidence was 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 in most parts of the world in the latter half of the last year, the emergence of newer strains of the virus slowed growth in those regions. Banks’ performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks’ finances to some extent in the near term.
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 #41, which places it in the top 16% 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 the group’s bottom-line growth potential. The industry’s 2022 earnings estimates have been revised 2.7% higher since December 2021 end.
Thus, we present a few stocks from the prospering industry that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Underperforms S&P 500 and Sector
The Zacks Foreign Banks Industry has underperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 5.9%. The S&P 500 composite has rallied 6.6% and the Zacks Finance Sector has appreciated 9.4%.
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 1.66X. 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 1.57X.
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 10.23X.
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 4.65X and the median level of 3.90X for the same period are above the Zacks Foreign Banks Industry’s ratios.
4 Foreign Banks to Keep an Eye On
HSBC: With its headquarter in London, HSBC provides a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of Sep 30, 2022, it had $2.99 trillion in assets.
For the past few years, HSBC has been undertaking measures to bolster its performance, with a special focus on building operations in Asia, including Hong Kong and China. In sync with this, the company fully acquired the issued share capital of AXA Insurance in Singapore for $529 million this February and agreed to acquire L&T Investment Management Limited for $425 million. HSBC intends to position itself as a top bank for high net worth and ultra-high net worth clients in Asia.
Moreover, HSBC plans to restructure its operations to further improve operating efficiency. In February 2020, the bank announced its transformation plan, which is aimed at reshaping underperforming businesses, simplifying complex organization and reducing costs.
As part of this initiative, the company expects to incur $6.5-$7 billion in charges and achieve at least $5.5 billion of cost savings by 2022-end and an additional $0.5 billion of savings next year.
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 in widening its customer base.
Currently, HSBC carries a Zacks Rank #2 (Buy). The stock has lost 0.7% on the NYSE over the past three months. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 5.1% upward over the past 60 days. Its 2023 earnings estimates have been revised 1.9% upward.
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.
The company is making efforts to become more digital and data-driven to provide clients with digital-first services. It 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. The company 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.
UBS’ expenses witnessed a CAGR of 2% in the four-year period ended 2021. Nevertheless, the bank was able to deliver $200-million gross savings in 2021, and is on track to deliver $1 billion gross cost savings per annum by 2023.
Currently, UBS carries a Zacks Rank #2. The stock has rallied 13.5% on the NYSE over the past three months. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 1.9% lower over the past 60 days. Its 2023 earnings estimates have been revised 1.5% upward.
Barclays: Headquartered in London, Barclays is a major global banking and financial services company, with £1,726.9 billion ($1,922.5 billion) in total assets as of Sep 30, 2022. The Zacks Rank #3 (Hold) company has been striving to simplify operations and focus on core businesses over the past few years.
With this aim, BCS restructured its business lines into two divisions and divested/closed several non-strategic and less profitable operations globally. The bank completed the ring-fencing of its investment banking operations in April 2018, while reintegrating its non-core division into core operations in July 2017. Driven by these initiatives, the company’s profitability is expected to improve over time.
Barclays’ cost-saving efforts are expected to further support the bottom line in the near term. While total operating expenses increased in 2021 and the first nine months of 2022, the same declined at a compound annual growth rate (CAGR) of 2.4% over the last six years (2016-2021). Overall costs are expected to remain manageable as business restructuring initiatives continue to offer support. Over the medium term, the cost to income ratio is targeted to be below 60%.
Barclays has been rewarding shareholders with enhanced capital deployments. The bank paid out a half-year dividend of 2.25 pence per share in September 2022. Also, on Oct 3, 2022, the company completed a share buyback of £0.5 billion. Barclays intends to initiate further share buybacks. In 2020, Barclays suspended its outstanding 2019 dividend payments in order to create a buffer against expected losses from the economic slowdown resulting from the pandemic.
Shares of the company have lost 0.4% over the past three months on the NYSE. The Zacks Consensus Estimate for BCS’ 2022 and 2023 earnings has moved up 8.1% and 5.9%, respectively, in the past 60 days.
Deutsche Bank: Headquartered in Frankfurt am Main, Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets. As of Sep 30, 2022, it had total assets of €1.49 trillion.
The bank’s efforts in reducing expenses have been bearing fruit. Although total non-interest expenses witnessed a volatile trend, the same recorded a negative CAGR of 2.9% over the last four years (ended 2021). The declining trend continued in the first nine months of 2022. Notably, in 2022, the company expects total expenses to be lower than the 2021 level due to lower transformation-related effects. DB remains dedicated to improving its cost base and identifying additional cost-saving endeavors.
Deutsche Bank aims to achieve capital distribution of approximately €8 billion for financial years 2021-2025. Although the company did not pay any dividends in 2020 and 2019, it plans to return excess capital to shareholders through dividends and share buybacks in the near term. In April 2022, it completed the share buyback of €0.3 billion, which was announced in January. This, along with dividend payments, will result in a capital distribution of approximately €0.7 billion for 2022.
Notably, Deutsche Bank has provided insights into its financial and capital plans for the coming years. It aims for a cost-to-income ratio of below 62.5% for 2025. Also, it expects revenues of approximately €30 billion by 2025, at a CAGR of 3.5-4.5% for 2021-2025. This is based on the expected business volume growth and present market opportunity.
Further, the bank strives to strengthen cross-divisional collaboration, harness growth and become more efficient in self-funding its investments.
The Zacks Consensus Estimate for the company’s 2022 earnings has declined 1.2% over the past 60 days. Earnings estimates for 2023 have been revised 2.9% lower for the same period. Shares of DB have gained 20.1% on the NYSE over the past three months. The company currently carries a Zacks Rank #3.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights HSBC, UBS, Barclays and Deutsche Bank
For Immediate Release
Chicago, IL – December 8, 2022 – Today, Zacks Equity Research discusses HSBC Holdings plc (HSBC - Free Report) , UBS Group AG (UBS - Free Report) , Barclays PLC (BCS - Free Report) and Deutsche Bank Aktiengesellschaft (DB - Free Report) .
Industry: Foreign Banks
Link: https://www.zacks.com/commentary/2026049/4-foreign-bank-stocks-to-keep-an-eye-on-in-a-prospering-industry
The Zacks Foreign Banks Industry will continue to benefit from higher rates as central banks across the globe are expected to keep raising interest rates to combat inflation. Thus, rising interest rates, along with higher loan demand, will support revenue growth for industry players like HSBC Holdings plc, UBS Group AG, Barclays PLC and Deutsche Bank Aktiengesellschaft.
While banks’ restructuring initiatives to focus on core operations will be fruitful in the long run, they have resulted in higher costs. Also, uneven economic recovery in developed and emerging nations has been hampering foreign banks’ revenue growth.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization might 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.
Additionally, 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, 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
Higher Interest Rates Likely to Support Top-Line Growth: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it eroded 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. This has been hampering banking operations globally. Nevertheless, almost all central banks across the globe have been raising interest rates since the beginning of this year to counter rising inflation, thereby providing support to banks’ top-line growth.
In fact, almost all the central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of England, have indicated more hikes in the coming period. Thus, higher rates are expected to help raise the net interest income and margins of banks across the globe.
Restructuring Efforts Might Result in Higher Costs: Several foreign banks are engaging in 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 aid growth in the long run, these have been leading to a rise in costs. Increased costs related to technology upgrades might hamper banks’ bottom-line growth to some extent.
Uneven Global Economic Recovery Might Pose a Concern: After the coronavirus outbreak in mid-March 2020, business confidence was 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 in most parts of the world in the latter half of the last year, the emergence of newer strains of the virus slowed growth in those regions. Banks’ performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks’ finances to some extent in the near term.
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 #41, which places it in the top 16% 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 the group’s bottom-line growth potential. The industry’s 2022 earnings estimates have been revised 2.7% higher since December 2021 end.
Thus, we present a few stocks from the prospering industry that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Underperforms S&P 500 and Sector
The Zacks Foreign Banks Industry has underperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 5.9%. The S&P 500 composite has rallied 6.6% and the Zacks Finance Sector has appreciated 9.4%.
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 1.66X. 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 1.57X.
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 10.23X.
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 4.65X and the median level of 3.90X for the same period are above the Zacks Foreign Banks Industry’s ratios.
4 Foreign Banks to Keep an Eye On
HSBC: With its headquarter in London, HSBC provides a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of Sep 30, 2022, it had $2.99 trillion in assets.
For the past few years, HSBC has been undertaking measures to bolster its performance, with a special focus on building operations in Asia, including Hong Kong and China. In sync with this, the company fully acquired the issued share capital of AXA Insurance in Singapore for $529 million this February and agreed to acquire L&T Investment Management Limited for $425 million. HSBC intends to position itself as a top bank for high net worth and ultra-high net worth clients in Asia.
Moreover, HSBC plans to restructure its operations to further improve operating efficiency. In February 2020, the bank announced its transformation plan, which is aimed at reshaping underperforming businesses, simplifying complex organization and reducing costs.
As part of this initiative, the company expects to incur $6.5-$7 billion in charges and achieve at least $5.5 billion of cost savings by 2022-end and an additional $0.5 billion of savings next year.
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 in widening its customer base.
Currently, HSBC carries a Zacks Rank #2 (Buy). The stock has lost 0.7% on the NYSE over the past three months. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 5.1% upward over the past 60 days. Its 2023 earnings estimates have been revised 1.9% upward.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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.
The company is making efforts to become more digital and data-driven to provide clients with digital-first services. It 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. The company 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.
UBS’ expenses witnessed a CAGR of 2% in the four-year period ended 2021. Nevertheless, the bank was able to deliver $200-million gross savings in 2021, and is on track to deliver $1 billion gross cost savings per annum by 2023.
Currently, UBS carries a Zacks Rank #2. The stock has rallied 13.5% on the NYSE over the past three months. The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 1.9% lower over the past 60 days. Its 2023 earnings estimates have been revised 1.5% upward.
Barclays: Headquartered in London, Barclays is a major global banking and financial services company, with £1,726.9 billion ($1,922.5 billion) in total assets as of Sep 30, 2022. The Zacks Rank #3 (Hold) company has been striving to simplify operations and focus on core businesses over the past few years.
With this aim, BCS restructured its business lines into two divisions and divested/closed several non-strategic and less profitable operations globally. The bank completed the ring-fencing of its investment banking operations in April 2018, while reintegrating its non-core division into core operations in July 2017. Driven by these initiatives, the company’s profitability is expected to improve over time.
Barclays’ cost-saving efforts are expected to further support the bottom line in the near term. While total operating expenses increased in 2021 and the first nine months of 2022, the same declined at a compound annual growth rate (CAGR) of 2.4% over the last six years (2016-2021). Overall costs are expected to remain manageable as business restructuring initiatives continue to offer support. Over the medium term, the cost to income ratio is targeted to be below 60%.
Barclays has been rewarding shareholders with enhanced capital deployments. The bank paid out a half-year dividend of 2.25 pence per share in September 2022. Also, on Oct 3, 2022, the company completed a share buyback of £0.5 billion. Barclays intends to initiate further share buybacks. In 2020, Barclays suspended its outstanding 2019 dividend payments in order to create a buffer against expected losses from the economic slowdown resulting from the pandemic.
Shares of the company have lost 0.4% over the past three months on the NYSE. The Zacks Consensus Estimate for BCS’ 2022 and 2023 earnings has moved up 8.1% and 5.9%, respectively, in the past 60 days.
Deutsche Bank: Headquartered in Frankfurt am Main, Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets. As of Sep 30, 2022, it had total assets of €1.49 trillion.
The bank’s efforts in reducing expenses have been bearing fruit. Although total non-interest expenses witnessed a volatile trend, the same recorded a negative CAGR of 2.9% over the last four years (ended 2021). The declining trend continued in the first nine months of 2022. Notably, in 2022, the company expects total expenses to be lower than the 2021 level due to lower transformation-related effects. DB remains dedicated to improving its cost base and identifying additional cost-saving endeavors.
Deutsche Bank aims to achieve capital distribution of approximately €8 billion for financial years 2021-2025. Although the company did not pay any dividends in 2020 and 2019, it plans to return excess capital to shareholders through dividends and share buybacks in the near term. In April 2022, it completed the share buyback of €0.3 billion, which was announced in January. This, along with dividend payments, will result in a capital distribution of approximately €0.7 billion for 2022.
Notably, Deutsche Bank has provided insights into its financial and capital plans for the coming years. It aims for a cost-to-income ratio of below 62.5% for 2025. Also, it expects revenues of approximately €30 billion by 2025, at a CAGR of 3.5-4.5% for 2021-2025. This is based on the expected business volume growth and present market opportunity.
Further, the bank strives to strengthen cross-divisional collaboration, harness growth and become more efficient in self-funding its investments.
The Zacks Consensus Estimate for the company’s 2022 earnings has declined 1.2% over the past 60 days. Earnings estimates for 2023 have been revised 2.9% lower for the same period. Shares of DB have gained 20.1% on the NYSE over the past three months. The company currently carries a Zacks Rank #3.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.