Fears of the U.S. regional banking sector facing a rerun of last year’s turmoil have surfaced after Moody’s downgraded New York Community Bancorp, Inc. (NYCB) credit rating to junk. Moreover, the Federal Reserve looks unlikely to start cutting rates from March, as policymakers signaled no rush to cut interest rates. This means interest rates will likely remain higher for a longer time.
Given this backdrop, it could be prudent to look beyond borders and invest in fundamentally strong foreign banking stocks Banco Santander, S.A. (SAN) and Akbank T.A.S. (AKBTY). However, not all foreign bank stocks are well-positioned to deliver market-beating returns. First Citizens BancShares, Inc.’s (FCNCA) weak fundamentals and growth prospects make it best avoided now.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the industry.
Following the global financial crisis of 2008, the U.S. banking industry faced its biggest challenge last year after the collapse of three regional banks. The industry continued to face challenges throughout the year due to credit rating downgrades, higher deposit costs, stringent lending standards, and large deposit outflows.
The regional bank industry now faces a fresh challenge after NYCB’s credit rating was downgraded to junk by Moody’s. The downgrade follows the bank’s bigger-than-expected provisions for potential bad loans arising out of its exposure to commercial real estate (CRE) loans.
Moody’s said that NYCB’s core historical CRE lending and significant unanticipated loss on its New York office and multifamily property could create potential confidence sensitivity. This has left investors fearful of the U.S. banking industry’s stability as many regional banks hold a significant chunk of these vulnerable commercial real estate loans.
Last week, the Federal Reserve held the policy rate steady within the 5.25% and 5.5% range. The benchmark interest rates have been in the same range since last July. Although there were indications by the central bank of three rate cuts this year, beginning in March, Fed policymakers have signaled that there is no rush to ease policy anytime soon given the strength of the labor market and the economy.
Therefore, with interest rates expected to persist at elevated levels for an extended period, it could pose challenges for U.S. banks. Consequently, considering the positive industry trends abroad, it might be prudent to explore investment opportunities in quality foreign bank stocks.
Let’s now analyze the fundamentals of the three foreign bank stocks mentioned above:
Stocks to Buy:
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 0.56x is 44.4% lower than the 1.01x industry average. Its 0.41x forward non-GAAP PEG is 69.7% lower than the 1.36x industry average. Likewise, its 4.68x trailing-12-month non-GAAP P/E is 54.8% lower than the 10.36x industry average.
For the fiscal year that ended December 31, 2023, SAN’s net interest income rose 12% over the prior-year period to €43.26 billion ($46.57 billion). Its profit attributable to the parent increased 15.3% year-over-year to €11.08 billion ($11.93 billion). The company’s ROA stood at 0.69%, compared to 0.63% in the previous year. Its EPS came in at €0.65, representing an increase of 20.4% over the prior-year period.
Also, its CET1 ratio stood at 12.3%, compared to 12% in the year-ago quarter.
Street expects SAN’s revenue for the quarter ending March 31, 2024, to increase 7% year-over-year to $16.34 billion. Its EPS for the quarter ending June 30, 2024, is expected to increase 26.5% year-over-year to $0.22. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 15.1% to close the last trading session at $3.97.
SAN’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 are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Momentum and a B for Value, Stability, and Sentiment. It is ranked first out of 89 stocks in the Foreign Banks industry. To access the ratings of SAN for Growth and Quality, click here.
Akbank T.A.S. (AKBTY)
Headquartered in Istanbul, Turkey, AKBTY provides various banking products and services in Turkey and internationally. It operates through Retail Banking, Commercial Banking, SME Banking, Corporate-Investment and Private Banking, and Wealth Management Treasury segments.
AKBTY’s 0.29x trailing-12-month GAAP PEG is 18.3% lower than the 0.35x industry average. Its forward Price/Sales of 1.46x is 40.4% lower than the 2.44x industry average.
AKBTY’s net interest income for the fiscal year ended December 31, 2023, came in at TL68.87 billion ($2.25 billion). Its revenue increased 37% year-over-year to TL141.54 billion ($4.62 billion). The company’s other income rose 27% year-over-year to TL1.66 billion ($54.25 million). Also, its net income increased 11% year-over-year to TL66.50 billion ($2.17 billion).
Street expects AKBTY’s revenue for the fiscal 2025 to increase 51.5% year-over-year to $7.26 billion. Over the past year, the stock has gained 82% to close the last trading session at $2.75.
ABKDY’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Stability. Within the same industry, it is ranked #12. Beyond what we’ve stated above, we have also rated the stock for Growth, Sentiment, and Quality. Get all ratings of AKBTY here.
Stock to Sell:
First Citizens BancShares, Inc. (FCNCA)
FCNCA operates as the holding company for First-Citizens Bank & Trust Company, which provides retail and commercial banking services to individuals, businesses, and professionals. The company offers deposit products, loan products, wealth management services, and investment management and advisory services.
In terms of forward Price/Sales, FCNCA’s 2.55x is 4.5% higher than the 2.44x industry average. Its 1.07x forward Price/Book is 5.2% higher than the 1.01x industry average.
FCNCA’s adjusted net income available to common stockholders for the fourth quarter ended December 31, 2023, declined 16.6% sequentially to $678 million. Its adjusted provision for credit losses increased 27.7% sequentially to $249 million. The company’s net interest income decreased 4% sequentially to $1.91 billion.
Also, its adjusted ROE came in at 13.53%, compared to 16.77% in the previous quarter. In addition, its adjusted EPS came in at $46.58, representing a decline of 16.7% sequentially.
Analysts expect FCNCA’s EPS and revenue for the quarter ending June 30, 2024, to decline 17.7% and 6.2% year-over-year to $43.30 and $2.27 billion, respectively. Over the past six months, the stock has declined 1.9% to close the last trading session at $1,484.03.
FCNCA’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
It is ranked #22 out of 36 stocks in the F-rated Mid-Atlantic Regional Banks industry. It has a D grade for Quality. Click here to see the additional ratings of FCNCA for Growth, Value, Momentum, Stability, and Sentiment.
What To Do Next?
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SAN shares fell $0.05 (-1.26%) in premarket trading Thursday. Year-to-date, SAN has declined -5.56%, versus a 4.75% 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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