The risks pertaining to the U.S. banking system continue to make investors and depositors jittery. However, some foreign banks present an attractive investment opportunity. Given the concerns over the prospects of domestic banks, it could be wise to add fundamentally strong foreign bank stocks Barclays (BCS), Deutsche Bank (DB), and Erste Group Bank (EBKDY) to one's watchlist. Read more….
The recent troubles of the U.S. banking industry are well known. The Federal Reserve's aggressive rate hikes since last year were one of the reasons for the collapse of the three regional banks this year. These bank failures were the biggest since the financial crisis of 2008.
Despite assurances that the banking system is safe, investors remain concerned. In this scenario, investors could look beyond boundaries as foreign banks have stable growth prospects and are available at attractive valuations. To that end, it could be wise to add fundamentally strong foreign bank stocks Barclays PLC (BCS), Deutsche Bank Aktiengesellschaft (DB), and Erste Group Bank AG (EBKDY) to one's watchlist.
Before diving deeper into the fundamentals of these stocks, let's discuss what's happening in the U.S. banking industry and why it could be prudent to add these foreign bank stocks to one's watchlist.
The failures of Silicon Valley Bank, Signature Bank, and the First Republic Bank were largely due to depositors' lack of confidence in their ability to stay afloat, leading them to panic. Investors took their deposits out in a hurry, causing a bank run. A chunk of those deposits has now reached the higher-yielding money market funds. For the week ended May 17, 2023, total money market fund assets increased by $13.56 billion to $5.34 trillion.
Investors' angst remains elevated after regional bank PacWest Bancorp (PACW) confirmed it was exploring strategic options, including a sale. The bank has said that it is in talks with investors. The bank recently reported that its deposits declined by 9.5% for the week ended May 5, 2023. Fitch downgraded the Long-Term Issuer Default Rating for PACW.
Furthermore, U.S. banks are also highly likely to face several regulatory challenges like increased capital requirements, heightened supervision, stricter risk management, increased disclosure, etc.
Tighter credit standards are also expected to lead to an increase in their operational costs and reduce their lending volumes, piling further pressure on their profitability. Citing a rapidly deteriorating operating environment, Moody's cut the outlook on the U.S. banking system to Negative from Stable.
Considering these factors, adding these featured foreign banking names to one's watchlist could be wise, given their growth prospects amid higher interest rates and discounted valuation.
Let's take a closer look at their fundamentals.
Barclays PLC (BCS)
Headquartered in London, the United Kingdom, BCS provides various financial services in the United Kingdom, Europe, the Americas, Africa, the Middle East, and Asia. The company operates through two segments, Barclays UK and Barclays International divisions. It offers financial services, such as retail banking, credit cards, wholesale banking, investment banking, wealth management, and investment management services.
On April 24, 2023, BCS announced a strategic partnership with British Gas. The partnership was launched with an offer of a 50% discount on a Hive Thermostat Mini for Barclays UK residential mortgage customers.
Barclays UK's Head of Sustainability, Nick Stace, said, "We want it to be easier and more affordable for customers to make their homes more efficient. Offering the Hive Thermostat Mini at a discount is one way we can do this for our UK residential mortgage customers, alongside our Greener Home Reward, which provides a cash reward of up to £2,000 towards the cost of making bigger energy efficiency-related home improvements."
In terms of forward non-GAAP P/E, BCS' 5.29x is 37.7% lower than the 8.49x industry average. Its 0.92x forward Price/Sales is 54.1% lower than the 2.01x industry average. Likewise, its 0.36x trailing-12-month Price/Book is 63% lower than the 0.97x industry average.
BCS' total income for the first quarter ended March 31, 2023, increased 11.4% year-over-year to £7.24 billion ($9 billion). Its profit after tax increased 25.7% over the prior-year quarter to £2.04 billion ($2.54 billion). In addition, its attributable profit increased 27% year-over-year to £1.78 billion ($2.21 billion).
Its EPS came in at 11.3p, representing an increase of 34.5% year-over-year. Also, its return on average tangible shareholders' equity came in at 15%, compared to 11.5% in the prior-year quarter.
Analysts expect BCS' revenue for the quarter ending June 30, 2023, to increase 4.2% year-over-year to $8.50 billion. Its EPS for fiscal 2024 is expected to increase 13% year-over-year to $1.69. Over the past six months, the stock has gained 4.2% to close the last trading session at $7.92.
BCS' POWR Ratings reflect this positive outlook. BCS has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #4 out of 88 stocks in the Foreign Banks industry. It has an A grade for Momentum and a B for Value and Sentiment. Click here to see the other ratings of BCS for Growth, Stability, and Quality.
Deutsche Bank Aktiengesellschaft (DB)
Based in Frankfurt am Main, Germany, DB provides corporate and investment banking and asset management products and services to private clients, corporate entities, and institutional clients worldwide. It operates through the Corporate Bank, Private Bank, and Asset Management segments.
In terms of forward non-GAAP P/E, DB's 5.65x is 33.4% lower than the 8.49x industry average. Its 0.69x forward Price/Sales is 65.5% lower than the 2.01x industry average. Likewise, its 0.28x trailing-12-month Price/Book is 71.6% lower than the 0.97x industry average.
For the first quarter ended March 31, 2023, DB's net interest income increased 19% year-over-year to €3.42 billion ($3.69 billion). Its net revenue increased 4.8% year-over-year to €7.68 billion ($8.30 billion). The company's profit attributable to DB shareholders rose 9.2% year-over-year to €1.30 billion ($1.40 billion). Also, its EPS came in at €0.61, representing an increase of 10.9% year-over-year.
For the quarter ending June 30, 2023, DB's revenue is expected to increase 15.3% year-over-year to $7.82 billion. Its EPS for fiscal 2023 is expected to increase 2.2% year-over-year to $1.87. Over the past nine months, the stock has gained 18.1% to close the last trading session at $10.58.
DB's POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system.
Within the same industry, it is ranked #7. It has an A grade for Momentum and a B for Value and Sentiment. To see the other ratings of DB for Growth, Stability, and Quality, click here.
Erste Group Bank AG (EBKDY)
Headquartered in Vienna, Austria, EBKDY provides a range of banking and other financial services to retail, corporate, and public sector customers. The company operates through Retail, Corporates, Group Markets, Asset/Liability Management & Local Corporate Center, Savings Banks, and Group Corporate Center segments. It provides mortgage and consumer loans, investment products, current accounts, and savings products.
In terms of forward GAAP P/E, EBKDY's 5.13x is 42.3% lower than the 8.89x industry average. Its 1.25x forward Price/Sales is 37.9% lower than the 2.01x industry average. Likewise, its 0.61x trailing-12-month Price/Book is 36.7% lower than the 0.97x industry average.
EBKDY's net interest income for the first quarter ended March 31, 2023, increased 27.1% year-over-year to €1.77 billion ($1.91 billion). Its net result attributable to owners of the parent increased 32.3% year-over-year to €593.60 million ($641.18 million). The company's operating result rose 56.9% year-over-year to €1.26 billion ($1.36 billion).
Analysts expect EBKDY's revenue for the quarter ending June 30, 2023, to increase 27.5% year-over-year to $2.76 billion. Its EPS for fiscal 2023 is expected to increase 21.2% year-over-year to $3.26. Over the past nine months, the stock has gained 40.3% to close the last trading session at $16.72.
EBKDY's strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It is ranked #5 in the Foreign Banks industry. It has a B grade for Value, Stability, and Sentiment. Click here to see the other ratings of EBKDY for Growth, Momentum, and Quality.
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BCS shares rose $0.01 (+0.13%) in premarket trading Friday. Year-to-date, BCS has gained 4.63%, versus a 10.42% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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