2023 was a challenging year for U.S. banks as they faced various operational and macroeconomic challenges. Despite expectations of three rate cuts this year, interest rates will likely remain reasonably high. This could continue to affect the profitability of U.S. banks. Moreover, a weak economy, deterioration of asset quality, and the likelihood of default on commercial real estate (CRE) loans could put pressure on the U.S. banking system.
Amid this backdrop, it could be wise to look beyond borders and invest in fundamentally strong foreign banking names Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), Banco do Brasil S.A. (BDORY), KB Financial Group Inc. (KB), Banco Santander, S.A. (SAN), and Commerzbank AG (CRZBY) as they are insulated against the headwinds currently facing U.S. banks.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the industry.
Last year, the U.S. banking industry had to endure many challenges, including the failure of three regional banks, credit rating downgrades, higher deposit costs, stringent lending standards, and large deposit outflows. Banks whose businesses relied on mergers and initial public offerings were severely affected as higher interest rates, fears of a recession, and worsening geopolitical conditions affected deal-making on Wall Street.
Despite these challenges, top U.S. banks managed to report strong third-quarter results on the back of high-interest rates and increased write-offs. Although the Fed has predicted three rate cuts this year, with the first one expected in March, if inflation surges again, the Fed might be forced to hold rates high for longer.
The Fed is expected to cut its key rate to around 3.75% by the end of 2024, but it will only fall to around 3% by the end of 2026 before rising back to around 3.5% after that. Interest rates remaining higher for longer could lead to businesses and consumers borrowing less while banks are forced to pay more for their funding. Moreover, it could also impact the market value of long-dated bonds which the banks are holding.
The sluggish economy, stringent lending standards, weakness in the commercial real estate (CRE) market, rising credit card debt, and reduced net interest income for banks mean that U.S. banks could continue to face headwinds this year.
Considering this backdrop, let's take a look at the fundamentals of the five Foreign Banks stock picks, starting with number 5.
Stock #5: Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)
Headquartered in Bilbao, Spain, BBVA provides retail banking, wholesale banking, and asset management services. It offers current accounts, demand, savings, overnight, time, term, and subordinated deposits. The company also provides loan products, deals in securities; leasing, factoring, brokerage, and asset management services; and manages pension and investment funds.
In terms of forward non-GAAP P/E, BBVA’s 6.74x is 36.6% lower than the 10.62x industry average. Its 0.47x forward non-GAAP PEG is 66.9% lower than the 1.41x industry average. Likewise, its 1.04x forward Price/Book is 13.6% lower than the 1.21x industry average.
BBVA’s net interest income for the third quarter ended September 30, 2023, increased 22.5% year-over-year to €6.43 billion ($7.10 billion). Its gross income rose 16.3% over the prior-year quarter to €7.96 billion ($8.78 billion). The company’s operating income increased 15.3% year-over-year to €4.65 billion ($5.13 billion).
Also, its net attributable profit increased 13.3% year-over-year to €2.08 billion ($2.30 billion). In addition, its adjusted EPS came in at €0.33, representing an increase of 13.8% year-over-year.
Street expects BBVA’s revenue for the quarter ended December 31, 2023, to increase 15.3% year-over-year to $8.26 billion. Its EPS for fiscal 2024 is expected to increase 1.1% year-over-year to $1.36. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 50.6% to close the last trading session at $9.11.
BBVA’s POWR Ratings reflect this positive outlook. It 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 #8 out of 89 stocks in the Foreign Banks industry. It has a B grade for Growth, Momentum, and Stability. Click here to see the other ratings of BBVA for Value, Sentiment, and Quality.
Stock #4: Banco do Brasil S.A. (BDORY)
Headquartered in Brasila, Brazil, BDORY provides banking products and services for individuals, companies, and public sectors in Brazil and internationally. The company operates through Banking, Investments, Fund Management, Insurance, Electronic Payments, and Other segments.
In terms of forward non-GAAP P/E, BDORY’s 4.49x is 57.7% lower than the 10.62x industry average. Its 1.76x forward Price/Sales is 35.3% lower than the 2.71x industry average. Likewise, its 0.56x forward non-GAAP PEG is 60.5% lower than the 1.41x industry average.
For the fiscal third quarter ended September 30, 2023, BDORY’s net interest income rose 21.1% year-over-year to R$23.68 billion ($4.88 billion). Its net financial margin increased 7.5% year-over-year to R$16.16 billion ($3.33 million). The company’s adjusted net income increased 4.5% year-over-year to R$8.79 billion ($1.81 million).
For the quarter ended December 31, 2023, BDORY’s EPS and revenue are expected to increase 7.5% and 17% year-over-year to $0.66 and $4.85 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 70.9% to close the last trading session at $11.43.
BDORY’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 #6. It has an A grade for Stability and a B for Value and Momentum. To see the additional ratings of BDORY for Growth, Sentiment, and Quality, click here.
Stock #3: KB Financial Group Inc. (KB)
Headquartered in Seoul, South Korea, KB provides a range of banking and related financial services to consumers and corporations worldwide. The company operates through seven segments: Retail Banking, Corporate Banking, Other Banking, Credit Card, Securities, Life Insurance, and Non-Life Insurance. It offers loans, deposit products, and other related financial products and services, investment banking, brokerage, etc.
In terms of forward non-GAAP PEG, KB’s 0.34x is 76.2% lower than the 1.41x industry average. Its 1.26x forward Price/Sales is 53.5% lower than the 2.71x industry average. Likewise, its 4.28x trailing-12-month non-GAAP P/E is 59.7% lower than the 10.62x industry average.
KB’s net interest income for nine months ended September 30, 2023, increased 5.3% year-over-year to KRW8.85 trillion ($6.83 billion). Its net operating profit increased 20% year-over-year to KRW6.13 trillion ($4.73 billion). The company’s profit for the period increased 7.4% year-over-year KRW4.35 trillion ($3.36 billion).
Analysts expect KB’s EPS and revenue for the quarter ended December 31, 2023, to increase 113.5% and 3.2% year-over-year to $1.35 and $3.10 billion, respectively. Over the past six months, the stock has gained 14.8% to close the last trading session at $41.37.
KB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #5 in the Foreign Banks industry. It has an A grade for Stability and a B for Value and Momentum. Click here to see KB’s additional ratings for Growth, Sentiment, and Quality.
Stock #2: Banco Santander, S.A. (SAN)
Headquartered in Madrid, Spain, SAN provides various retail and commercial banking products and services to individuals, small and medium-sized enterprises, and large companies worldwide. The company operates through Retail Banking, Santander Corporate & Investment Banking, Wealth Management & Insurance, and PagoNxt segments. It offers time and demand deposits, current and savings accounts, mortgages, corporate loans, etc.
On December 20, 2023, SAN announced the closing of the transaction with the FDIC to participate in a joint venture consisting of a $9 billion portfolio of New York-based multifamily real estate assets retained by the FDIC following Signature Bank’s failure. SAN acquired a 20% equity stake in the joint venture and will service 100% of the assets in the portfolio.
SAN’s executive chair, Ana Botin, said, “This transaction underscores our strength and scale, leveraging our considerable expertise in the sector. We are a major participant in the U.S. multifamily space, and this transaction plays to our strengths.”
In terms of forward Price/Book, SAN’s 0.61x is 49.6% lower than the 1.21x industry average. Its 0.37x forward non-GAAP PEG is 73.6% lower than the 1.41x industry average. Likewise, its 5.97x trailing-12-month non-GAAP P/E is 43.7% lower than the 10.62x industry average.
For the fiscal third quarter that ended September 30, 2023, SAN’s net interest income rose 6.6% sequentially to €11.22 billion ($12.38 billion). Its profit attributable to the parent increased 8.7% sequentially to €2.90 billion ($3.20 billion). The company’s ROA stood at 0.71%, compared to 0.67% in the previous quarter. Its EPS came in at €0.17, representing an increase of 8.5% sequentially.
Also, its CET1 ratio stood at 12.3%, compared to 12.1% in the year-ago quarter.
Street expects SAN’s revenue for the quarter ended December 31, 2023, to increase 4.3% year-over-year to $15.39 billion. Its EPS for fiscal 2024 is expected to increase 12.5% year-over-year to $0.78. Over the past year, the stock has gained 38.9% to close the last trading session at $4.14.
SAN’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Value, Momentum, and Stability. It is ranked #4 in the same industry. To access the other ratings of SAN for Growth, Sentiment, and Quality, click here.
Stock #1: 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 0.60x is 51% lower than the 1.22x industry average. Its 1.24x forward Price/Sales is 54.2% lower than the 2.71x industry average.
CRZBY’s net interest income for the third quarter ended September 30, 2023, increased 33.6% year-over-year to €2.17 billion ($2.39 billion). The company’s operating profit increased 295.7% year-over-year to €1.12 billion ($1.24 billion). Also, its consolidated profit rose 250.8% year-over-year to €684 million ($754.91 million).
Its total revenues rose 46.1% over the prior-year quarter to €2.76 billion ($3.05 billion). In addition, its CET1 ratio came in at 14.6%, compared to 13.8% in the prior-year quarter.
For the quarter ended December 31, 2023, CRZBY’s revenue is expected to increase 9% year-over-year to $2.75 billion. Over the past year, the stock has gained 26.1% to close the last trading session at $11.79.
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.
Within the Foreign Banks industry, it is ranked #3. It has a B grade for Growth, Value, Momentum, Stability, and Sentiment. Click here to see CRZBY’s Quality rating.
What To Do Next?
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SAN shares rose $0.01 (+0.24%) in premarket trading Tuesday. Year-to-date, SAN has gained 0.24%, versus a -0.67% 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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