The collapses of the Silicon Valley Bank and Signature Bank in March, followed by the failure of the First Republic Bank in April, the second-biggest bank collapse in U.S. history, have caused a sudden loss of confidence in the U.S. banking system, prompting bank runs and forcing the government to offer extra support to the system.
With the U.S. banking crisis far from over, investors could consider adding quality foreign bank stocks China Minsheng Banking Corp., Ltd. (CMAKY) and Grupo Financiero Galicia S.A. (GGAL) to their watchlist this week. However, it seems wise to steer clear of the fundamentally weak stock, Banco Santander-Chile (BSAC), now.
Before delving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the U.S. banking sector and why it could be wise to invest in foreign bank stocks instead.
The U.S. banking crisis commenced in March, mainly due to multiple interest rate hikes made by the Federal Reserve over the past year to control inflation and growing recession worries. A total of three regional U.S. banks, including Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank, faced closure between March and April this year.
These bank failures were the biggest to hit the nation since the 2008 financial crisis. Investors withdrew their deposits in a panic, causing a bank run. As a result, high-yielding money-market funds have attracted a significant influx of cash lately. For the week ended June 7, 2023, total money market fund assets increased by $36.63 billion to $5.46 trillion, the Investment Company Institute reported.
Furthermore, according to JPMorgan Chase CEO Jamie Dimon, the stress on the banking sector caused by recent bank failures is still a threat and could affect the financial system for “years to come.” In his annual shareholder letter, Dimon wrote, “Most of the risks were hiding in plain sight,” citing interest rate exposure and the potential losses from held-to-maturity bonds.
Dimon added, “The unknown risk was that SVB's over 35,000 corporate clients — and activity within them — were controlled by a small number of venture capital companies and moved their deposits in lockstep.” He cautioned against a heavy-handed regulatory response to the bank collapses.
Against this backdrop, investors could consider adding quality foreign bank stocks CMACY and GGAL to their watchlist as they will likely benefit from the rising interest rate environment. On the contrary, avoiding fundamentally weak stock BSAC could be wise now.
Stocks to Watch:
China Minsheng Banking Corp., Ltd. (CMAKY)
Headquartered in Beijing, China, CMAKY provides several financial products and services to individuals, small and micro-enterprises, corporate customers, government agencies, and financial institutions. The company operates through three segments: Corporate Banking; Retail Banking; and Others.
In terms of trailing-12-month P/E, CMAKY’s 5.32x is 43.6% lower than the 9.43x industry average. The stock’s 1.77x trailing-12-month Price/Sales is 23.8% lower than the 2.33x industry average. In addition, its 0.68x trailing-12-month Price/Cash Flow is 89.2% lower than the 6.28x industry average.
For the first quarter that ended March 31, 2023, CMAKY’s operating income increased marginally year-over-year to RMB36.77 billion ($5.15 billion). Its net profit attributable to shareholders of the Bank, excluding extraordinary gain/loss items, grew 4.3% from the year-ago value to RMB14.27 billion ($2 billion). Also, the company’s EPS was RMB0.33, up 6.5% year-over-year.
In addition, CMAKY’s cash inflows from operating activities came in at RMB225.97 billion ($31.68 billion), an increase of 58.9% year-over-year. As of March 31, 2023, its total assets were RMB7.60 trillion ($1.07 trillion), compared to RMB7.26 trillion ($1.02 trillion) as of December 31, 2022.
Analysts expect CMAKY’s revenue for the fiscal year 2024 to increase 5.6% year-over-year to $21.23 billion. Over the past six months, the stock has gained 22.8% to close the last trading session at $4.10.
CMAKY’s POWR Ratings reflect this positive outlook. The stock 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.
CMAKY has an A grade for Stability and a B for Value and Momentum. It is ranked #16 out of 88 stocks in the Foreign Banks industry.
Click here to see the other ratings of CMAKY for Growth, Sentiment, and Quality.
Grupo Financiero Galicia S.A. (GGAL)
Based in Buenos Aires, Argentina, GGAL is a financial service holding company that offers various financial products and services to individuals and companies. The company operates through Banks, NaranjaX, insurance, and Other Businesses segments. It provides personal loans, express, and mortgage loans; credit and debit cards; and other online banking services.
In the first quarter that ended March 31, 2023, GGAL’s net operating income increased 30.5% year-over-year to Ps.186.32 billion ($760.65 million), primarily due to a higher net interest income. The company reported a net income of Ps.15.03 billion ($61.36 million), an increase of 55% from the same quarter of 2022, and represented an annualized ROE of 10,14% and a ROA of 1.80%.
Furthermore, the company’s average earning assets reached Ps.2.23 trillion ($9.10 billion), up 5.4% compared to the first quarter of 2022. The increase was mainly due to a rise in the volume of government securities for Ps.283.27 billion ($1.16 billion) or 38% year-over-year.
In terms of forward non-GAAP P/E, GGAL is trading at 4.07x, 55.2% lower than the industry average of 9.08x. And the stock’s forward Price/Sales multiple of 1.14 is 49.4% lower than the industry average of 2.25. Likewise, its forward Price/Cash Flow of 1.07x is 83% lower than the 6.28x industry average.
The consensus EPS estimate of $3.64 for the fiscal year (ending December 2023) reflects a 15.4% year-over-year improvement. In addition, GGAL’s revenue for the ongoing year is expected to grow 183.6% year-over-year to $3.82 billion.
Over the past six months, shares of GGAL have gained 99.1% and 87.2% over the past year to close the last trading day at $14.81.
GGAL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, and Momentum. In the same industry, GGAL is ranked #14 of 88 stocks.
Beyond what I have stated above, we have also given GGAL grades for Quality, Stability, and Sentiment. Get all GGAL ratings here.
Stock to Sell:
Banco Santander-Chile (BSAC)
Headquartered in Santiago, Chile, BSAC provides commercial and retail banking products and services. It operates through segments, including Retail Banking; Middle-Market; Corporate Investment Banking; and Corporate Activities. It offers debit and credit cards and savings products; consumer, commercial, and government-guaranteed loans; and mortgage financial services.
In terms of forward non-GAAP P/E, BSAC is trading at 10.68x, 17.6% higher than the industry average of 9.08x. Likewise, the stock’s forward Price/Sales and Price/Book multiples of 3.03 and 1.90 compare unfavorably with the industry averages of 2.25 and 0.99, respectively.
During the first quarter that ended March 31, 2023, BSAC’s operating income decreased 16% year-over-year to Ch$ 489.20 billion ($620.03 million). Its consolidated profit for the period was Ch$139.79 billion ($177.17 million), down 41.7% year-over-year. Also, EPS attributable to equity holders of the Bank declined by 42.4% from the year-ago value to Ch$0.72.
Furthermore, cash inflows from operating activities were Ch$664.42 billion ($842.11 million), a decline of 39.3% from the prior quarter in 2022. Also, cash outflows from investment activities came in at Ch$13 billion ($16.48 million), up 76.6% year-over-year.
Analysts expect BSAC’s revenue for the second quarter (ending June 2023) to decline 3.6% year-over-year to $713.86 million. The company’s EPS for the same period is expected to decrease 47.7% year-over-year to $0.38. In addition, it has failed to surpass the consensus revenue and EPS estimates in three of the trailing four quarters, which is disappointing.
Over the past month, BSAC has plunged 3.3% to close the last trading session at $18.94.
BSAC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, translating to a Sell in our proprietary rating system.
BSAC has a D grade for Value and Sentiment. It is ranked #85 of 88 stocks in the Foreign Banks industry.
To see BSAC’s POWR Ratings for Growth, Stability, Quality, and Momentum, click here.
What To Do Next?
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CMAKY shares were unchanged in premarket trading Monday. Year-to-date, CMAKY has gained 10.22%, versus a 12.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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