The U.S. banking industry finds itself in a spot of bother after major credit rating agencies downgraded multiple banks. This has put banking stocks under pressure lately.
Amid the uncertainty lingering around the stability of the U.S. banking sector, it could be wise to look beyond borders and invest in fundamentally strong foreign banking names KB Financial Group Inc. (KB), Commerzbank AG (CRZBY), and Erste Group Bank AG (EBKDY) as they are insulated from the troubles in the U.S. banking sector.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the U.S. banking industry and why it could be prudent to buy foreign bank stocks.
Higher borrowing costs, large deposit outflows, and elevated interest rates have tested the U.S. banking sector's strength. Credit rating agencies have been cutting credit ratings of some banks due to concerns over their financial health. Many of these banks have exposure to commercial real estate (CRE), which faces the risk of default.
In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrades of America’s biggest banks. Earlier this month, Moody’s downgraded ten banks and put six others on notice. The S&P Global followed Moody’s to downgrade five U.S. banks while putting two others on notice.
Zacks Investment Management client portfolio manager Brian Mulberry said, “These downgrades are mainly focused on the liquidity concerns now raised by multiple agencies where banks have a lot of loan portfolios that are only drawing 2.5-4.5% in interest income while now needing to pay depositors 4.5-5.5% in savings and money market accounts.”
The bank downgrades are primarily due to the benchmark interest rates, which are at their highest level in 22 years. The high-interest rates have increased the deposit costs for banks. Higher interest rates and stricter lending standards make it difficult for borrowers to get loans.
The recent rating downgrades would put more pressure on U.S. banks, leading to higher borrowing costs and even stricter lending standards. More rating downgrades could further deteriorate the U.S. banking sector’s operating environment.
Considering this backdrop, let's take a look at the fundamentals of the three best Foreign Banks stocks, starting with number 3.
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.
In terms of non-GAAP PEG, KB’s 0.32x is 74.1% lower than the 1.23x industry average. Its 1.23x forward Price/Sales is 47% lower than the 2.32x industry average. Likewise, its 3.97x trailing-12-month non-GAAP P/E is 56.8% lower than the 9.19x industry average.
KB’s net interest income for the second quarter ended June 30, 2023, increased 5.4% year-over-year to KRW2.97 trillion ($2.24 billion). Its net operating profit increased 40.4% year-over-year to KRW2.05 trillion ($1.55 billion). The company’s profit for the period increased 23.9% year-over-year KRW1.50 trillion ($1.13 billion).
Analysts expect KB’s EPS and revenue for the quarter ending September 30, 2023, to increase 30.4% and 8.1% year-over-year to $2.83 and $3.16 billion, respectively. Over the past three months, the stock has gained 9.5% to close the last trading session at $40.06.
KB’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating 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 #9 out of 89 stocks in the Foreign Banks industry. It has an A grade for Stability and a B for Value and Momentum. To see the additional POWR Ratings of KB for Growth, Sentiment, and Quality, click here.
Stock #2: 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 0.41x is 60.4% lower than the 1.04x industry average. Its 1.20x forward Price/Sales is 48.1% lower than the 2.32x industry average.
For the six months ended June 30, 2023, CRZBY’s net interest income increased 41.6% year-over-year to €4.08 billion ($4.45 billion). The company’s operating profit increased 36.9% year-over-year to €1.76 billion ($1.92 billion). Also, its consolidated profit rose 38% year-over-year to €1.14 billion ($1.87 billion). In addition, its EPS came in at €0.76, representing an increase of 64.6% year-over-year.
For the quarter ending September 30, 2023, CRZBY’s revenue is expected to increase 56.8% year-over-year to $2.96 billion. Over the past year, the stock has gained 74.5% to close the last trading session at $11.24.
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 same industry, it is ranked #6. It has a B grade for Growth, Value, Momentum, and Stability. Click here to see CRZBY’s Sentiment and Quality ratings.
Stock #1: Erste Group Bank AG (EBKDY)
Headquartered in Vienna, Austria, EBKDY provides a range of banking and other financial services to retail, corporate, and public sector customers. The company operates through Retail, Corporates, Group Markets, Asset/Liability Management & Local Corporate Center, Savings Banks, and Group Corporate Center segments. It provides mortgage and consumer loans, investment products, current accounts, and savings products.
In terms of forward GAAP P/E, EBKDY’s 4.96x is 49.1% lower than the 9.75x industry average. Its 1.33x forward Price/Sales is 42.4% lower than the 2.32x industry average. Likewise, its 0.67x trailing-12-month Price/Book is 35.9% lower than the 1.04x industry average.
EBKDY’s net interest income for the second quarter ended June 30, 2023, increased 24% year-over-year to €1.79 billion ($1.95 billion). Its net result attributable to owners of the parent increased 30.2% year-over-year to €896.30 million ($976.69 million). The company’s operating result rose 35.1% year-over-year to €1.43 billion ($1.56 billion). Its CET1 ratio came in at 14.9%, compared to 14.2% in the year-ago quarter.
Street expects EBKDY’s revenue for the quarter ending September 30, 2023, to increase 35.5% year-over-year to $2.87 billion. Its EPS for fiscal 2023 is expected to increase 40.3% year-over-year to $3.68. Over the past year, the stock has gained 61.9% to close the last trading session at $18.24.
EBKDY’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.
It is ranked #4 in the Foreign Banks industry. It has a B grade for Growth, Value, Momentum, Stability, and Sentiment. To see the EBKDY’s Quality rating, click here.
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KB shares were trading at $40.35 per share on Thursday afternoon, up $0.29 (+0.72%). Year-to-date, KB has gained 6.10%, versus a 18.94% 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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