Despite showing signs of stability, the U.S. banking industry currently faces the challenges of higher deposit costs, the risk of a potential default on commercial real estate (CRE) loans, and rating downgrade by top rating agencies.
Considering these factors, it could be wise to look beyond borders and invest in fundamentally soaring foreign bank stocks Commerzbank AG (CRZBY), Intesa Sanpaolo S.p.A. (ISNPY), and Banco BBVA Argentina S.A. (BBAR).
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 buy foreign bank stocks.
The failure of the three regional banks earlier this year had shaken up the U.S. banking industry. Despite successfully mitigating the outflow of deposits from banks, the sector currently faces the challenges of higher borrowing costs, rising deposit costs, and rating downgrades. The U.S. banking industry also faces the prospect of maintaining higher capital levels, which could dent future earnings.
In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrade of America’s biggest banks. Earlier this month, Moody’s downgraded ten banks and put six others on notice. The S&P Global followed Moody’s to downgrade five U.S. banks while putting two others on notice.
The rating downgrades are primarily due to the benchmark interest rates at their highest level in 22 years. Although the Fed opted to hold interest rates steady last week, it signaled another rate hike later this year in order to bring inflation to its 2% target.
The high-interest rates have raised the deposit costs for banks. Also, higher interest rates and stricter lending standards make it difficult for borrowers to get loans. With interest rates unlikely to be cut in the near term, loan growth could remain under pressure. Further rating downgrades could exacerbate the U.S. banking sector’s operating environment, leading to higher borrowing costs and even stricter lending standards.
However, foreign banks could continue to benefit from the higher interest rate environment in their home countries.
Considering this backdrop, let's take a look at the fundamentals of the three Foreign Banks stock picks, starting with number 3.
Stock #3: Commerzbank AG (CRZBY)
CRZBY provides banking and capital market products and services to private and small business customers, corporate groups, financial service providers, and institutional clients in Germany and internationally. It operates through two segments: Private and Small-Business Customers and Corporate Clients. CRZBY is based in Frankfurt am Main, Germany.
In terms of trailing-12-month Price/Book, CRZBY’s 0.38x is 62.5% lower than the 1.01x industry average. Its 1.11x forward Price/Sales is 49.7% lower than the 2.21x industry average.
For the six months ended June 30, 2023, CRZBY’s net interest income increased 41.6% year-over-year to €4.08 billion ($4.34 billion). The company’s operating profit increased 36.9% year-over-year to €1.76 billion ($1.87 billion). Also, its consolidated profit rose 38% year-over-year to €1.14 billion ($1.21 billion). In addition, its EPS came in at €0.76, representing an increase of 64.6% year-over-year.
For the quarter ending September 30, 2023, CRZBY’s revenue is expected to increase 56.8% year-over-year to $2.96 billion. Over the past year, the stock has gained 27.2% to close the last trading session at $10.23.
CRZBY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
Within the Foreign Banks industry, it is ranked #16 out of 89 stocks. It has a B grade for Growth, Value, Momentum, and Stability. Click here to see CRZBY’s Sentiment and Quality ratings.
Stock #2: Intesa Sanpaolo S.p.A. (ISNPY)
Headquartered in Turin, Italy, ISNPY provides various financial products and services primarily in Italy. It operates through six segments: Banca dei Territori, IMI Corporate & Investment Banking, International Subsidiary Banks, Asset Management, Private Banking, and Insurance.
In terms of forward non-GAAP PEG, ISNPY’s 0.22x is 81.3% lower than the 1.18x industry average. Its 1.80x forward Price/Sales is 18.8% lower than the 2.21x industry average. Likewise, its 6.55x forward non-GAAP P/E is 26.1% lower than the 8.86x industry average.
For the six months ended June 30, 2023, ISNPY’s net interest income rose 68.9% year-over-year to €6.84 billion ($7.28 billion). Its operating income increased 15.3% over the year-ago period to €12.40 billion ($13.20 billion). The company’s net income rose 80% year-over-year to €4.22 billion ($4.49 billion). Also, its ROE and ROA came in at 16.1% and 0.9%, compared to 8.1% and 0.4% in the year-ago period, respectively.
In addition, its EPS came in at €0.23, representing an increase of 91.7% year-over-year.
Analysts expect ISNPY’s revenue for the quarter ending September 30, 2023, to increase 40.7% year-over-year to $7.03 billion. Its EPS for fiscal 2023 is expected to increase 35.7% year-over-year to $2.40. Over the past year, the stock has gained 42.9% to close the last trading session at $15.73.
ISNPY’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #14 in the same industry. It has a B grade for Growth, Momentum, and Sentiment. To see the other ratings of ISNPY for Value, Stability, and Quality, click here.
Stock #1: Banco BBVA Argentina S.A. (BBAR)
Headquartered in Buenos Aires, Argentina, BBAR provides various banking products and services to retail and corporate customers in Argentina. It offers various retail banking products and services, such as savings and checking accounts, time deposits, credit and debit cards, consumer finance loans, mortgage loans, and automobile loans. The company also provides personal loans, document discounts, and overdrafts.
In terms of forward Price/Book, BBAR’s 0.51x is 47.3% lower than the 0.98x industry average. Its 0.78x forward Price/Sales is 64.9% lower than the 2.21x industry average. Likewise, its 2.57x forward non-GAAP P/E is 71.1% lower than the 8.86x industry average.
BBAR’s net interest income for the fiscal second quarter ended June 30, 2023, increased 58.4% year-over-year to ARS185.51 billion ($530.04 million). Its net operating income rose 46.7% year-over-year to ARS218.10 billion ($623.16 million). The company’s net income for the period came in at ARS30.36 billion ($86.75 million).
Street estimates BBAR’s EPS for the quarter ending September 30, 2023, to increase 40% year-over-year to $0.41. Its revenue for fiscal 2023 is expected to increase 33.6% year-over-year to $2.59 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 44.8% to close the last trading session at $4.72.
BBAR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has a B grade for Value and Momentum. Within the Foreign Banks industry, it is ranked #10. Click here to see the additional ratings of BBAR for Growth, Stability, Sentiment, and Quality.
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ISNPY shares fell $0.08 (-0.51%) in premarket trading Monday. Year-to-date, ISNPY has gained 21.01%, versus a 13.43% 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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