Zacks Industry Outlook Highlights: Barclays, Credit Suisse, Mitsubishi UFJ Financial, Mizuho Financial Group and Sumitomo Mitsui Financial Group

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For Immediate Release

Chicago, IL - January 27, 2017 - Today, Zacks Equity Research discusses the Foreign Banks, including Barclays (NYSE: BCS - Free Report ), Credit Suisse (NYSE: CS - Free Report ), Mitsubishi UFJ Financial Group, Inc. (NYSE: MTU - Free Report ), Mizuho Financial Group, Inc. (NYSE: MFG - Free Report ) and Sumitomo Mitsui Financial Group, Inc. (NYSE: SMFG - Free Report ).

Industry: Foreign Banks

Link: commentary/102223/foreign- banks-stock-outlook---january- 2017

The surprise Trump presidency and the Fed's rate hike, which revitalized U.S. bank stocks, actually spell trouble for the other economies and their banks. Also, there hasn't been any measurable progress on the global economic growth front that can translate to strength for foreign banks.

However, these haven't stopped foreign bank stocks from gaining some traction lately, as their success in reducing costs by realigning business and growing overall lending convinced investors. Moreover, slightly better economic growth helped them to enhance deposits and fortify asset quality, as consumers and businesses became relatively less levered.

This is clearly evident from the Zacks categorized Banks-Foreign industry's 20.2% gain over the past six months versus just 4.9% gain of the S&P 500.

Before we discuss how the prospects of foreign banks are shaping up, let's take a look at whether it's worth paying more premium for the stocks in the industry.

Do Foreign Bank Stocks Still Hold Upside Potential?

Yes, they do. While the industry significantly outperformed the broader market over the last six months, there is still a value-oriented path ahead. Looking at the industry's price-to-book ratio, which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next, investors might still want to pay more.

The industry currently has a trailing 12 month P/B ratio of 1.36 - the highest level seen in the last six months. When compared with its own average of 1.22 over that period, any further upside potential looks unlikely.

However, the space actually compares pretty favorably with the market at large, as the trailing 12 month P/B for the S&P 500 is at 3.36 and the median level is 3.28.

Overall, while the valuation from a P/B perspective looks stretched when compared with the industry's own range in the time period, its lower-than-market positioning calls for some more upside in the quarters ahead.

The group's Zacks Industry Rank confirms this view. Though this 57-company industry has seen an 8% downward revision in earnings estimates in the recent past, it carries a Zacks Industry Rank of #83, which places it at the top 31% of the 265 Zacks classified industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Expected Pickup in Economic Growth Might Alleviate Some Pressure

The World Bank sounded a little optimistic about global economic growth in 2017. In its Global Economic Prospects report released earlier this month, the bank predicted a rate of 2.7% versus 2.3% seen last year. This moderate pickup in growth is expected to stem from improvements in emerging markets and developing economies.

While a rise in interest rates in the U.S. and a strengthening dollar will lead to capital outflow and make credit expensive for emerging and developing economies, a recovery in prices for commodities like oil and metals, which many of these economies export, will help them to grow moderately. And this will spur banking activities in these economies.

In fact, the World Bank expects two large commodity exporting economies - Brazil and Russia - to see an end to the slowdown they have been witnessing for quite some time now.

On the other hand, though growth in the developed economies is expected to be slightly better than 2016, uncertainties created by Brexit, Trump's victory and the Fed rate hike will pose as hurdles on the path to progress. As a result, banks in these regions will struggle to show any improvement.

Bumpy Road Ahead for Banks in Key Nation

Shares of the major European banks, including Barclays (NYSE: BCS - Free Report ) and Credit Suisse (NYSE: CS - Free Report ), significantly underperformed their U.S. counterparts last year due to a dearth of business following negative rates and economic woes. The negative rates on deposits are forcing them to lend money to corporates and individuals, but this is not helping them in generating decent returns.

Moreover, the U.K. referendum to exit the European Union heightened their risks. Along with Brexit-induced uncertainties, bad assets on balance sheets and an unfavorable rate environment will hinder European banks from showing signs of improvement any time soon.

The prospects of the banks in Japan remain uncertain with the central bank leaving its interest rate unchanged at negative 0.1% at its Dec 2016 meeting. However, the central bank revised its views up on exports and output based on the yen's decline against the greenback. The economic growth is unlikely to materially benefit the country's banking system by offsetting the damage caused by the negative rate environment.

The aggressive negative interest rate backdrop already led to shrinking profits for Japan's top banks last year from April through September. The top three banks by assets -- Mitsubishi UFJ Financial Group, Inc. (NYSE: MTU - Free Report ), Mizuho Financial Group, Inc. (NYSE: MFG - Free Report ) and Sumitomo Mitsui Financial Group, Inc. (NYSE: SMFG - Free Report ) -- witnessed respectively 18%, 7% and 7.5% declines in net profit during that period.

The latest hike in interest rates in the U.S. will create growth headwinds for China due to significant capital outflow from the economy. Moreover, after a number of rate cuts in an effort to stimulate the economy, the benchmark rate in China currently stands at 4.35%, which is not unfavorable for its banks.

However, the nation's banks may not get any further support on the rate front as the central bank may not be able to raise rates any time soon. On the other hand, the economy's credit vulnerability could be dangerous for its banking system.

Weak Macro Backdrop to Continue Curbing Growth

A slight pickup in economic growth will definitely support foreign banks with business gains. But the continuation of loose monetary policy - needed to revitalize growth in the developed economies - will mar the rate-sensitive portion of their revenues.

On the other hand, any action to lower interest rates in emerging markets (like Brazil) that have a tight monetary policy could aggravate inflation issues. This, in turn, would take a toll on their banks.

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Barclays PLC (BCS): Free Stock Analysis Report

Credit Suisse Group (CS): Free Stock Analysis Report

Mitsubishi UFJ Financial Group Inc (MTU): Free Stock Analysis Report

Mizuho Financial Group, Inc. (MFG): Free Stock Analysis Report

Sumitomo Mitsui Financial Group Inc (SMFG): Free Stock Analysis Report

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

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

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