5 Top Stocks from the Prospering Foreign Banks Industry

The Zacks Foreign Banks Industry is likely to tide over the broader challenges as developments on coronavirus vaccine front will aid economic recovery. Though the low rates remain headwind, the developed nations and the emerging economies are anticipated to make the backdrop favorable for their banks, going forward.

Gradual easing of regulations is anticipated to support the industry as well. Thus, some of the industry players like Royal Bank Of Canada (RY), Toronto Dominion Bank (TD), UBS Group AG (UBS), Shinhan Financial Group (SHG) and Bank of N.T. Butterfield & Son Limited (NTB) will likely benefit from these developments.

Industry Description

The Zacks Foreign Banks Industry consists of overseas banks that also have operations in the United States. Since a foreign banking organization might have both federally- 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 U.S. customers, these banks offer financial services to corporate clients having businesses in the United States.

Moreover, these financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of both wholesale and retail services, along with conducting money-market transactions for their parent organizations, while others involve in developing only specialized services.

3 Foreign Banks Industry Trends to Watch

Favorable Coronavirus Vaccine Data to Act as Tailwind: The COVID-19 pandemic shattered business confidence and loomed over corporate earnings and global growth since the beginning of 2020. Nevertheless, thanks to the positive developments on the coronavirus vaccine, the trend is expected to gradually reverse. The vaccine is anticipated to combat the health crisis and help in the revival of economies across the globe to some extent, which, in turn, will support foreign banks.

Impact of Low Interest-Rate Environment: The central banks across the globe cut interest rates with the aim to cushion the economies from the coronavirus-induced slowdown. While the effort aided the economies, it continues to erode banks’ profitability. As economic recovery is likely to be uneven in developed nations (which are homes to a number of major foreign banks) and the emerging economies, rise in interest rates is less likely in the near term. Therefore, significant support to foreign banking operations is apprehended.

Easing Regulations to Provide Some Respite: Foreign banks in the United States are trying to push the central bankto get some regulatory relief in terms of capital requirements, which are perceived to be too high for carrying out operations profitably. Therefore, expected easing of regulations under the new regime will likely aid foreign banking operations.
 

Zacks Industry Rank Indicates Solid Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.

The Zacks Foreign Banks Industry is a 61-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #102, which places it at the top 40% 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 consistent outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 the solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since August 2020, the industry’s earnings estimate for the current year has been revised 13.3% upward.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
 

Industry Lags on Shareholder Returns

The Zacks Foreign Banks Industry has underperformed both the S&P 500 and its own sector in the past year.

While stocks in this industry have collectively depreciated 8.3%, the S&P 500 composite has gained 45.1%, and the Zacks Finance Sector has appreciated 13.5%.
 

Two-Year Price Performance

 

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 1.35X. When compared with the highest level of 2.11X and median level of 1.64X over the past five years, there is apparently plenty of upside left.

Additionally, the industry is trading at lower levels when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 15.92X and the median level is 10.79X.
 

Price-to-Tangible Book Ratio (TTM)
 


 

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 3.48X and the median level of 3.52X for the same period are way above the Zacks Foreign Banks Industry’s respective ratios.
 

Price-to-Tangible Book Ratio (TTM)

5 Foreign Banks to Keep a Close Eye on

Royal Bank Of Canada: Headquartered in Canada, it operates as a diversified financial service company globally.Being a recognized leader in ESG and corporate citizenship, the bank inculcates differentiated technology investments and digital capabilities, along with disciplined approach to risk and expense management. Holding the topmost position in investment bank in Canada, it has recorded return on equity (ROE) of 14.2% in fiscal 2020, and returned 63% of profits to shareholders through dividends and repurchases.

This Zacks Rank #2 (Buy) stock has appreciated 21% in six months’ time on NYSE. The Zacks Consensus Estimate for the fiscal-year 2021 earnings has moved up 4.3% to $6.62 in the past 30 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: RY
 


 

Toronto Dominion Bank: The company offersvarious personal and commercial banking products and services in Canada and the United States. The bank works with a diversified business model, and also provides capital markets, and corporate and investment banking services; and trading, funding, and investment services to companies, governments, and institutions.

Per Bharat Masrani, Group president and chief executive officer (CEO), this Canada-based bank“ became a major shareholder in The Charles Schwab Corporation, one of the most innovative and highly-regarded investment firms in the U.S. and despite uncertainties, TD Bank will address the hurdles ahead, contribute to the recovery and continue to invest in our future growth.”

The Zacks Consensus Estimate for fiscal 2021 earnings has moved 6.9% north to$4.65 over the past month.The stock presently holds a Zacks Rank of 2. Shares of the company have rallied 24.2% on NYSE over the past six months.

Price and Consensus: TD

UBS Group AG: This Zacks Rank #2 stock’s business strategy is centered on pre-eminent global wealth management businesses and universal bank in Switzerland, along with global asset management business and investment bank. Based in Zurich, the company’s efficiency programs will likely free up resources to make investments to support growth and enable it to service clients with greater dexterity, improving quality and speed to market.

Over the years, UBS Group AG has been fortifying its footprint in various areas by undertaking partnerships with other firms, and maintaining cost discipline and capital-deployment activities. Nevertheless, the prevalent negative interest rates in Switzerland and across Europe, and dismal growth in the European economy remain key concerns.

Its shares have rallied 29.3% over the past six months on the NYSE. The Zacks Consensus Estimate for 2020 earnings has increased 2.1% to $1.49, over the past 30 days.
 

Price and Consensus: UBS

Shinhan Financial Group Co Ltd: This Zacks Rank #1 stock offers financial products and services in South Korea and worldwide. Based in Seoul, the company has succeeded in securing sustainable growth through a diversified portfolio, and recorded growth in interest and fee income with consistent efforts toward strategic cost control.

In 2017, the bank set an ambitious goal of leading the future of finance through the “2020 S•M•A•R•T Project”, and since then, all have been working together to realize that goal.

On the NYSE, shares of the company have gained 22.8% over the past six months. The Zacks Consensus Estimate for ongoing-year earnings has moved 35.9% north to $5.90, inthe past 30 days.
 

Price and Consensus: SHG

Bank of N.T. Butterfield & Son Limited: Headquartered in Bermuda, the company provides a range of community, commercial, and private banking services to individuals and small to medium-sized businesses.  It operates through offices in the Cayman Islands, Guernsey, Jersey, the U.K., The Bahamas, Switzerland, Singapore, Mauritius, and Canada.

Amid the current global turbulence, the bank recorded decent revenues, which along with cost management efforts will likely continue boosting its profitability. With steady loan growth and capital-deployment activities, thisZacks Rank #2 stock has appreciated24.4% in six months’ time on the NYSE. The Zacks Consensus Estimate for current-year earnings has remained unchanged at $2.90 in the past 30 days.
 

Price and Consensus: NTB

 

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UBS Group AG (UBS): Free Stock Analysis Report
 
Toronto Dominion Bank The (TD): Free Stock Analysis Report
 
Shinhan Financial Group Co Ltd (SHG): Free Stock Analysis Report
 
Royal Bank Of Canada (RY): Free Stock Analysis Report
 
Bank of N.T. Butterfield & Son Limited The (NTB): Free Stock Analysis Report
 
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