A slow economy, prolonged high interest rates, increased deposit expenses, diminished credit demand, potential defaults on commercial real estate loans, escalating credit card debt, and a decline in asset quality overshadow the U.S. banking industry's outlook for the year.
Given this backdrop, it could be prudent to look beyond borders and invest in fundamentally strong foreign banking stocks Woori Financial Group Inc. (WF), Intesa Sanpaolo S.p.A. (ISNPY), and Shinhan Financial Group Co., Ltd. (SHG).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the industry.
After the global financial crisis of 2008, the U.S. banking sector faced one of its biggest crises last year when three regional banks collapsed. The problems continued as the industry faced credit rating downgrades, higher deposit costs, stringent lending standards, and large deposit outflows.
Despite the challenges, most U.S. banks reported robust third-quarter results due to high net interest income and increased write-offs. The Federal Reserve held rates steady in a range between 5.25% and 5.5% for the third straight time last month and indicated three quarter-percentage-point rate cuts by the end of 2024.
However, the recently disclosed minutes from the Federal Reserve indicate that there was no deliberation on the initiation timing of rate cuts. The officials maintained the possibility of keeping rates elevated should inflation experience a resurgence.
If interest rates persist at elevated levels for an extended period, it could pose challenges for U.S. banks. Consequently, considering the positive industry trends abroad, it might be prudent to explore investment opportunities in quality foreign bank stocks.
Let's take a look at the fundamentals of the three Foreign Banks stock picks, starting with the third choice.
Stock #3: Woori Financial Group Inc. (WF)
WF operates as a commercial bank that provides a range of financial services to individual, business, and institutional customers in Korea. It operates in Banking, Credit Card, Capital, Investment Banking, and Others segments. The company offers savings, demand, and installment deposits, time deposits, and certificates of deposit. It is based in Seoul, South Korea.
In terms of forward non-GAAP P/E, WF’s 3.54x is 66.2% lower than the 10.46x industry average. Likewise, its 0.92x forward Price/Sales is 65.4% lower than the 2.66x industry average.
WF’s net operating revenue for the third quarter ended September 30, 2023, increased marginally year-over-year to ₩2.48 trillion ($1.89 billion). The company’s net income rose 37.6% over the prior-year quarter to ₩918 billion ($699.63 million). Its operating income increased 36.6% year-over-year to ₩1.22 trillion ($932.07 million). Also, its net interest income came in at ₩2.19 trillion ($1.67 billion).
Street expects WF’s EPS and revenue for fiscal 2024 to increase 6.9% and 3.2% year-over-year to $8.84 and $7.87 billion, respectively. Over the past nine months, the stock has gained 10.2% to close the last trading session at $28.73.
WF’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. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #15 out of 89 stocks in the Foreign Banks industry. It has an A grade for Value and Momentum and a B for Stability and Sentiment. Click here to see the other ratings of WF for Growth and Quality.
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 84.5% lower than the 1.42x industry average. Its 1.99x forward Price/Sales is 25.2% lower than the 2.66x industry average. Likewise, its 7.05x forward non-GAAP P/E is 32.7% lower than the 10.46x industry average.
For the nine months ended September 30, 2023, ISNPY’s net interest income rose 65.5% year-over-year to €10.65 billion ($11.65 billion). Its operating income increased 19% over the year-ago period to €18.77 billion ($20.54 billion). The company’s net income rose 85.3% year-over-year to €6.12 billion ($6.70 billion). Also, its ROE and ROA came in at 16% and 0.9%, compared to 8.2% and 0.4% in the year-ago period, respectively.
In addition, its EPS came in at €0.33, representing an increase of 94.1% year-over-year.
Analysts expect ISNPY’s revenue and EPS for the quarter ended December 31, 2023, to increase 12.8% and 20.9% year-over-year to $6.91 billion and $0.54, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 27.4% to close the last trading session at $18.07.
ISNPY’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
Within the same industry, it is ranked #11. It has an A grade for Momentum and a B for Growth and Sentiment. To see the other ratings of ISNPY for Value, Stability, and Quality, click here.
Stock #1: Shinhan Financial Group Co., Ltd. (SHG)
Headquartered in Seoul, South Korea, SHG provides financial products and services. The company operates through six segments: Banking, Credit Card, Securities, Life Insurance, Credit, and Others. It offers retail banking, checking accounts, mortgage and home equity, retail lending, electronic banking and automatic teller machines (ATM), bill paying, payroll and check-cashing, currency exchange, and wire fund transfer services.
In terms of forward non-GAAP P/E, SHG’s 4.58x is 56.2% lower than the 10.46x industry average. Its 1.32x forward Price/Sales is 50.3% lower than the 2.66x industry average. Likewise, its 1.23x forward non-GAAP PEG is 13.9% lower than the 1.42x industry average.
SHG’s interest income for the third quarter ended September 30, 2023, increased 1.1% year-over-year to ₩2.76 trillion ($2.10 billion). Its operating income rose 10% year-over-year to ₩2.17 trillion ($1.65 billion). The company’s consolidated net income came in at ₩1.19 trillion ($910 million). Also, its CET1 ratio stood at 12.90%, compared to 12.64% in the prior-year quarter.
For the quarter ended December 31, 2023, SHG’s EPS and revenue are expected to increase 112.9% and 16.3% year-over-year to $0.94 and $2.65 billion, respectively. Over the past three months, the stock has gained 10.8% to close the last trading session at $28.52.
SHG’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #9 in the Foreign Banks industry. It has an A grade for Momentum and a B for Growth, Value, Stability, and Sentiment. Click here to see SHG’s rating for Quality.
What To Do Next?
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ISNPY shares were unchanged in premarket trading Friday. Year-to-date, ISNPY has gained 3.02%, versus a -1.69% 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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