Foreign Banks Industry Outlook: Near-Term Prospects Bleak

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The Zacks Foreign Banks Industry consists 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 provide financial services to their corporate clients having businesses in the United States.

Moreover, these banks establish relations with U.S. corporations operating in the home country of the former. 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 uncertainty stemming from the ongoing trade conflicts might negatively impact overseas banking transactions. However, normalization of monetary policy by some central banks across the globe may keep the momentum alive in the foreign banking space, which ended the first half of 2018 with a decent recovery.
  • Near-term growth prospects of foreign banks are being called into question due to the weak recovery witnessed by banks in the developed nations (except the United States) and persistent trouble faced by banks 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 may act against the sustainability of economic growth that the world has been witnessing. And any sluggishness in global economic growth could dampen the prospects for increasing banking activities. In addition, foreign banks in the United States are trying to push the Federal Reserve 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 Cloudy Prospects

The Zacks Foreign Banks Industry is a 56-stock group within the broader Zacks Finance Sector . The industry currently carries a Zacks Industry Rank #195, which places it at the bottom 24% 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.

Our proprietary Heat Map shows that the industry's rank has remained in bottom 50% over the past eight weeks.

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 the beginning of the second half of 2018, the industry's earnings estimate for the current year has been revised downward by 5.5%.

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 over the past two years.

While the stocks in this industry have collectively increased 7.8%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 28.8% and 18.8%, 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 1.62X in the last five years. When compared with the highest level of 2.13X and median level of 1.77X over that period, 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 10.51X and the median level is 7.38X.

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 3.48X and the median level of 3.02X 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. In fact, a stronger dollar and rising U.S. Treasury yields have been putting pressure on some of the emerging economies and it could spread across the others too.

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

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

Banco Santander (Mexico), S.A., Institucion de Banca Multiple, Grupo Financiero Santander (BSMX): The stock of this Mexico-based bank has produced 5.7% returns over the past six months. The consensus EPS estimate for the current year has been revised 2.8% upward over the last 60 days. The stock sports a Zacks Rank #1, currently.

Price and Consensus: BSMX

Toronto Dominion Bank (TD): The stock of this Toronto, Canada-based bank has gained 2.5% over the past six months. The Zacks Consensus Estimate for the current-year EPS has been revised 1.9% upward over the last 60 days. The stock currently carries a Zacks Rank #2.

Price and Consensus: TD

Canadian Imperial Bank of Commerce (CM): The consensus EPS estimate for this Toronto, Canada-based bank has moved slightly up for the current fiscal year, over the last 60 days. The stock has rallied 2.3% over the past six months. The stock holds a Zacks Rank of 2, at present.

Price and Consensus: CM

Bank Of Montreal (BMO): The stock of this Montreal, Canada-based bank has produced 5.5% returns over the past six months. The consensus EPS estimate for the current fiscal year has been revised 1.2% upward over the last 60 days. The stock has a Zacks Rank #2, currently.

Price and Consensus: BMO

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Investing Ideas , Stocks
Referenced Symbols: TD , CM , BSMX , BMO

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