For Immediate Release
Chicago, IL – May 24, 2023 – Today, Zacks Equity Research discusses Banco Santander, S.A. SAN, Deutsche Bank Aktiengesellschaft DB and Bancolombia S.A. CIB.
Industry: Foreign Banks
The Zacks Foreign Banks Industry will continue to benefit from higher rates. While the pace of the hikes might slow down, central banks across the globe will keep rates relatively high in the near term. Higher interest rates and solid loan demand will likely support revenue growth for industry players like Banco Santander, S.A., Deutsche Bank Aktiengesellschaft and Bancolombia S.A.
While banks’ restructuring initiatives to focus on core operations will be fruitful in the long run, these have resulted in higher costs. Uneven economic recovery in developed and emerging nations has hampered revenue growth.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks with operations in the United States. Since a foreign banking organization might 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
The High Interest Rate Environment 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. But, it eroded banks’ profitability to a great extent. The pace of economic recovery, which remains uneven in the developed (home to a number of major foreign banks) and emerging nations, hampered banking operations globally.
Nevertheless, almost all central banks across the globe have been raising interest rates since the beginning of 2022 to counter inflation, which supported their top-line growth. Although the pace of interest rate hikes will likely slowdown in the near term, banks are expected to witness continued growth in net interest income and margins given the relatively 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 an 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 in most parts of the world has recovered from the negative impacts of the pandemic, growth slowed in some regions because of certain issues like the Russia-Ukraine war, supply-chain disruptions and other geopolitical concerns. Banks’ performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks’ finances to some extent in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Foreign Banks Industry is a 68-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 44% 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 outperform 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 solid earnings outlook for 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 2023 earnings estimates have been revised 13.1% higher since May 2022 end.
We present a few stocks from the prospering industry that you may wish to invest in. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Underperforms S&P 500 But Outperforms the Sector
The Zacks Foreign Banks Industry has underperformed the S&P 500 while outperforming its sector in the past two years.
Stocks in the industry have collectively lost 6.6%. The S&P 500 composite has lost 0.8% and the Zacks Finance Sector has depreciated 12%.
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 1.58X. When compared with the highest level of 1.86X over the past five years, there is a slight upside left. Notably, the current value compares with the median value of 1.57X.
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 9.98X.
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. But 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 4.09X and the median level of 3.93X for the same period are above the Zacks Foreign Banks Industry’s ratios.
3 Foreign Banks Worth Investing In
Banco Santander: Headquartered in Madrid, Spain, this Zacks Rank #2 (Buy) company provides various retail and commercial banking products and services to individuals, small and medium-sized enterprises and large companies worldwide.
The company has a diversified geographical footprint, which is well-balanced between emerging and developed markets. It is committed to increasing the customer base. Over the last seven years, SAN increased its number of customers. In first-quarter 2023, it increased its customer base by 9 million on a year-over-year basis.
In line with its strategy to deploy capital to the most profitable businesses, SAN completed the acquisition of SC USA minority interests in the United States in 2022. Also, the acquisition of Amherst Pierpont has been completed.
The company maintains disciplined cost management. This has enabled it to maintain one of the best efficiency ratios in the sector, with an efficiency ratio of 44.1% in first-quarter 2023.
The bank outlined its 2023 targets this February. Accordingly, it expects double-digit income growth, a return on tangible equity of more than 15% and a cost-to-income ratio of 44-45%. By 2023-2025, SAN expects a payout ratio of 50% and a RoTE of 15-17%.
Shares of the company have gained 21.8% in the past six months on the NYSE. The Zacks Consensus Estimate for the company’s 2023 and 2024 earnings has moved up 6.9% and 8.2%, respectively, in the past 60 days.
Deutsche Bank: Headquartered in Frankfurt am Main, Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets. As of Mar 31, 2023, it had total assets of €1.31 trillion.
The bank’s efforts in reducing expenses have been bearing fruit. Although total non-interest expenses increased in 2021 and the first three months of 2023, it recorded a negative compound annual growth rate (CAGR) of 6.7% over the last three years (ended 2022). DB is dedicated to reduce its cost base by identifying additional cost-saving endeavors. The initiatives are expected to provide structural cost savings of more than €2.5 billion between 2022 and 2025.
Deutsche Bank aims to achieve capital distribution of approximately €8 billion for financial years 2021-2025. Although the company did not pay any dividends in 2020 and 2019, it plans to return excess capital to shareholders through dividends and share buybacks in the near term. The company expects to commence buybacks in the second half of 2023. Moreover, it aims to achieve a payout ratio of 50% from 2025 onwards.
Notably, Deutsche Bank has provided insights into its financial and capital plans for the coming years. It aims for a cost-to-income ratio of below 62.5% for 2025. Also, it expects a revenue CAGR of 3.5-4.5% for 2021-2025.
The bank strives to strengthen cross-divisional collaboration, harness growth and become more efficient in self-funding its investments.
The Zacks Consensus Estimate for the company’s 2023 earnings has been revised upward by 3.2% over the past 60 days. Earnings estimates for 2024 have been revised marginally lower for the same period. Shares of DB have inched up 0.3% on the NYSE in the past six months. The company currently carries a Zacks Rank #2.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bancolombia: Being one of the biggest Colombian financial institutions, the company provides banking products and services to individuals and corporate customers. CIB offers checking and savings accounts, fixed-term deposits, investment products, financial support to real estate developers, mortgages for individuals and companies and financial and operating leasing services, among others.
Bancolombia continues with its efforts to diversify and innovate its product portfolio. Despite the ongoing global supply-chain disruptions and inflationary pressures, high commodity prices are expected to support the company’s investments and exports.
Similar to the previous quarters, CIB witnessed year-over-year growth in loan balances across all geographies in the first quarter of 2023. Originations maintain an encouraging trend not only in commercial loans but also in retail and home-lending. Given the higher interest rates, driven by the current contractionary monetary policy in Colombia, CIB is expected to continue to witness an increase in interest income in the coming quarters, thus aiding top-line growth.
The Zacks Consensus Estimate for the company’s 2023 earnings has increased 2.7% over the past 60 days. Earnings estimates for 2024 have been revised 2% upward for the same period. Shares of CIB have lost 8.1% on the NYSE in the past six months. The company currently carries a Zacks Rank of 2.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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