Zacks Industry Outlook Highlights: UBS Group AG, Credit Suisse Group AG and Commerzbank AG
UBS Group AG, Credit Suisse Group AG and Commerzbank AG are highlighted in this industry outlook article.
For Immediate Release
Industry: Banks - Non-U.S.
The Zacks Foreign Banks Industry has been bearing the brunt of lower interest rates for a long time now. Banks across the globe are undertaking restructuring efforts to focus more on core operations, resulting in higher costs, and thus hurting profits. While the impressive vaccination drive to combat the pandemic has aided economic recovery, the recovery is uneven in developed and emerging nations.
Nevertheless, with the expectations of a few rate hikes this year to combat inflation increases, foreign banks like UBS Group AG, Credit Suisse Group AG and Commerzbank AG, are expected to benefit.
About the Industry
The Zacks Foreign Banks Industry consists of overseas banks, which have operations in the United States as well. 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 customers in the United States, the banks offer financial services to corporate clients having businesses in the country.
Additionally, these financial firms establish relations with U.S. corporations operating in their home countries. Some units of foreign banks offer a broad range of wholesale as well as retail services along with conducting money-market transactions for their parent organizations, while others are involved in developing only specialized services.
3 Foreign Bank Industry Trends to Watch
Uneven Global Economic Recovery Might Continue to be a Headwind: Since the outbreak of the coronavirus in mid-March 2020, business confidence has been shattered across the globe as the pandemic loomed over corporate earnings and economic growth. While the record pace of vaccine coverage globally aided economic recovery most of last year, the emergence of newer strains of the virus (which are perceived to be more infectious than the previous strains) might slow down economic growth in many parts of the world.
Banks’ performance is directly linked to the performance of the overall economy. Thus, uneven economic growth might hurt banks’ financials to an extent in the near term.
Restructuring Efforts Likely to Lead to a Rise in Costs: Several banks across the globe have been engaging in business restructuring efforts. Many foreign banks have been divesting/closing non-core operations in an effort to increase focus on core business and regions.
While the restructuring efforts are expected to aid growth in the long run, they might lead to a rise in costs in the near term. Along with this, an increase in costs related to technology upgrades might hamper banks’ bottom-line growth to some extent.
Rate Hike Expectations Likely to Provide Some Respite: In an effort to cushion economies from the pandemic-induced economic slowdown, central banks across the globe reduced benchmark interest rates to record lows in 2020. While the effort was successful in aiding immediate economic growth, it has been eroding banks’ profitability to great extent.
The pace of economic recovery also remains uneven in the developed (which are home to a number of major foreign banks) and the emerging nations, which has been hampering banking operations globally. Nevertheless, there have been signals from several central banks including the U.S. Federal Reserve, the European Central Bank and the Bank of England about a few rate hikes in 2022 to counter rising inflation. While a major change in the interest-rate scenario toward the positive side is less likely in the immediate term, any hike is expected to help raise interest income and margins of banks, thereby supporting top-line growth.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Foreign Banks Industry is a 63-stock group within the broader Zacks Finance Sector. The industry currently carries a Zacks Industry Rank #168, which places it in the bottom 34% 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of dismal earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s bottom-line growth potential. The industry’s 2021 earnings estimates have been revised 12.8% lower since August 2021-end.
Despite the near-term challenges, we are presenting a few stocks that you may want to consider for your portfolio. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Foreign Banks Industry has underperformed both the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively lost 0.6%. The S&P 500 composite has gained 51.7%, and the Zacks Finance Sector has appreciated 22.2%.
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 1.64X. When compared with the highest level of 2.12X over the past five years, there is decent upside left. Notably, the current value is in line with the median value.
Additionally, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 18.04X.
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 4.65X and the median level of 3.69X for the same period are above the Zacks Foreign Banks Industry’s respective ratios.
3 Foreign Banks to Buy
UBS: Headquartered in Zurich, the company’s business strategy is centered on pre-eminent global wealth-management businesses and a universal bank in Switzerland along with a global asset-management business and investment bank. UBS’s efficiency programs will likely free up resources to make investments to support growth and enable it to serve clients with greater dexterity, improving quality and speed to market.
Over the years, UBS has been fortifying its footprint in various areas by undertaking partnerships with other firms, and maintaining cost discipline and capital-deployment activities.
While the company expects to witness an increase in costs in the fourth quarter of 2021 due to seasonal effects, it remains on track to improve cost efficiency and cost management. The cost-to-income income ratio has also been gradually declining. In the third quarter of 2021, UBS was successful in delivering a cost-to-income ratio of 68.7%, the lowest since 2006.
Currently, UBS carries a Zacks Rank #2 (Buy). The stock has rallied 21.9% on the NYSE over the past six months. The Zacks Consensus Estimate for the company’s 2021 earnings has been unchanged over the past 60 days. Its 2022 earnings estimates have been revised 1% upward.
Credit Suisse: The Zurich-based Zacks Rank #2 company is a leading wealth manager with strong global investment banking capabilities. CS follows a balanced approach to wealth management. Its aim is to capitalize on the large pool of wealth within mature markets as well as the significant growth in wealth in the Asia Pacific and other emerging markets.
In November 2021, the company’s board of directors agreed on a long-term strategic direction and approved the introduction of a global business and regional matrix structure. Over the next couple of years, Credit Suisse aims to drive sustainable growth by strengthening its core, i.e., by shifting capital to value-creating businesses and exiting non-core markets and businesses.
The company also aims to simplify its operating model with a unified, global wealth management division, a unified, global investment bank and a central technology and operations function, driving structural cost discipline to fund strategic investments.
By 2024, Credit Suisse aims to achieve a return on tangible equity of more than 10%. Also, a common equity tier 1 (CET 1) ratio of more than 14% (pre-Basel III reforms) and a CET1 leverage ratio of 4.5% are expected to be achieved by 2024.
Shares of the company have lost 1.8% over the past six months on the NYSE. The Zacks Consensus Estimate for the company’s 2021 and 2022 earnings has moved up 15.9% and 1.5%, respectively in the past 60 days.
Commerzbank: Commerzbank is the leading bank for the German Mittelstand and a strong partner for various corporate client groups, and private and small-business customers in Germany. Headquartered in Frankfurt, CRZBY’s “Strategy 2024” represents customer-centricity, digitalization, sustainability, and profitability. The bank puts profitability before growth.
Through its two segments -- private and small-business customers, and corporate clients – the bank offers accounts, commercial payments, payment enabling, clearing and custody, and other services.
The firm’s transformation toward becoming a digital advisory bank is in line with its “Strategy 2024”. For 2021, CRZBY expects the CET1 ratio to be 13.5%. An overall positive operating result and a net profit are projected for 2021. Being a leading trade finance bank for German companies, Commerzbank continues to make progress with its sustainability targets.
The Zacks Consensus Estimate for the company’s 2021 earnings has increased significantly over the past 60 days. Earnings estimates for 2022 have been unchanged for the same time period. Shares of Commerzbank have gained 23.3% on the NYSE over 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/performancefor information about the performance numbers displayed in this press release.
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