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, higher interest rates will continue to provide support.
Thus, despite the geopolitical concerns, industry players like ICICI Bank Limited IBN, Itaú Unibanco Holding S.A. ITUB and Deutsche Bank Aktiengesellschaft DB are well-poised to benefit from the high interest rate environment.
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 Rates Likely 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 since the beginning of 2022 to counter inflation, which supported banks’ top-line growth. Despite the current pause in rate hikes, banks are expected to continue to witness growth in their net interest income and margins in the high interest rate environment.
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 a 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 in almost all parts of the world, 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 67-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #71, which places it in the top 28% 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. 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 most recent 2024 earnings estimates have been revised 4.4% higher since January 2023-end.
Thus, we present a few stocks from the industry that you may want to consider for your portfolio. 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
While the Zacks Foreign Banks Industry has outperformed its sector in the past two years, it has underperformed the S&P 500 in the same period.
Stocks in the industry have collectively gained 2.5%. The S&P 500 composite has rallied 7.8% and the Zacks Finance Sector has appreciated only 0.5%.
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 1.83X. When compared with the highest level of 1.90X over the past five years, there is a slight upside left. Notably, the current value compares with the median value of 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 10.68X.
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 4.75X and the median level of 4.23X for the same period are above the Zacks Foreign Banks Industry’s ratios.
Price-to-Tangible Book Ratio (TTM)
3 Foreign Banks to Consider
ICICI Bank: Headquartered in Mumbai, India, the company provides a wide range of banking products and financial services to corporate and retail customers.
ICICI Bank has made commendable progress in improving its digital banking services for retail and corporate clients. The bank has been striving to provide superior end-to-end seamless digital services, personalized solutions and value-added features to further enable data-driven cross-sell and up-sell opportunities.
The increasing adoption of the bank’s mobile banking app — iMobile Pay — is helping garner a solid market share. ICICI Bank’s digital platform for businesses — InstaBIZ — along with supply-chain platforms, has witnessed tremendous growth in the past few quarters. These efforts are leading to a rapid increase in end-to-end digital sanctions and disbursements across various products.
Moreover, IBN has been leveraging its technological initiatives to augment the contribution of non-interest income toward its top line. Driven by the efforts, its non-interest income continues to improve. The metric increased 15% in the first nine months of fiscal 2024 (ended Dec 31), following a 13% rise in fiscal 2023 and 27% growth in fiscal 2022. IBN’s efforts to digitize operations and a rise in mobile banking transactions will likely continue to help it garner more fee income, going forward.
Further, while ICICI Bank has wide international loan coverage, domestic loans represent a substantial part of its overall loans (97% as of Dec 31, 2023). As a result, the bank is secure with respect to loans and is less likely to be affected by global concerns.
Shares of the company have gained 16.3% on the NYSE in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has moved up 5.3% in the past 60 days. The consensus estimate indicates a rise of 23.2% from the previous year’s reported number. Currently, IBN carries a Zacks Rank #2 (Buy).
Price and Consensus: IBN
Itaú Unibanco: Headquartered in Sao Paulo, Brazil, this Zacks Rank #2 company, together with its subsidiaries, provides a vast array of credit and other financial services to a diverse customer base of individuals and companies in and outside Brazil via their international branches, subsidiaries and affiliates.
Intensive use of technology and electronic distribution channels serve as a competitive advantage for the company. ITUB has been expanding in Brazil and abroad on the back of strategic acquisitions. In 2022, the company acquired an 11.4% equity stake in XP Inc. Also, it inked a deal to acquire Ideal Holding to bolster its investment ecosystem and completed the first phase of the deal on Mar 31, 2023.
In 2020, Itau Unibanco completed the first phase of acquiring a 52.96% stake in Zup IT Servicos, aiding the development of digital transformation projects, and offering functionalities and digital products to its customers. In 2017, ITUB acquired Citigroup’s Brazilian consumer banking business. Such inorganic growth efforts are expected to support the company’s top line in the upcoming quarters.
Itau Unibanco has also displayed growth in revenues from commissions and fees, and results from insurance operations. The metric witnessed a compound annual growth rate (CAGR) of 4.6% over the three years ended 2022, with the uptrend continuing in the first nine months of 2023.
Given the company’s preeminent position in the asset management and investment banking businesses in Latin America, and growth opportunities in the insurance space, the metric is likely to keep improving in the quarters ahead, thus supporting the top line.
Shares of ITUB have gained 32.1% on the NYSE in the past 12 months. The Zacks Consensus Estimate for the company’s 2024 earnings has moved up 1.3% in the past 60 days. The estimate implies a year-over-year rise of 9.9%.
Price and Consensus: ITUB
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 5.5% over the three years ended 2022, with the uptrend continuing in the first nine months of 2023. 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.
Solid deposit balances also support DB’s financials. Though deposit balances declined in the first nine months of 2023 due to migration into higher-yielding investment products and continued inflationary pressure, the metric witnessed a CAGR of 2.4% over the four years ended 2022.
The company benefits from its well-diversified deposit base across various client segments and regions. Also, its loan-to-deposit ratio as of Sep 30, 2023, was 79.3%, reflecting a strong and stable funding base. Thus, we believe that the stable deposit balance will strengthen the company’s balance sheet.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised upward by 4.7% over the past 60 days. The estimate indicates a year-over-year rise of 7.8%. Shares of DB have lost 3% on the NYSE in the past year. The company currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DB
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