Foreign Banks Stock Outlook - January 2018

However, the space actually compares pretty favorably with the market at large, as the trailing 12-month P/B ratio for the S&P 500 is 4.00 and the median level is 3.46.

As finance stocks typically have a lower P/B ratio, comparing foreign banks with the S&P 500 may not make sense to many value investors. But a comparison of the group’s P/B ratio with that of its border sector ensures that the group is undervalued. The Zacks Finance Sector’s trailing 12-month P/B ratio of 2.63 and the median level of 2.26 over the same period are way above the Zacks Foreign Banks Industry’s respective ratios.

Overall, while the valuation from a P/B perspective looks stretched when compared with the industry’s own range since the beginning of the year, its lower-than-market and lower-than-sector positioning calls for a decent upside in the quarters ahead.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The group’s Zacks Industry Rank calls for underperformance in the near term. This 70-company industry carries a Zacks Industry Rank #177, which places it at the bottom 31% of more than 250 Zacks industries. Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The concerns over the impact of Trump’s tax overhaul on full-year 2017 results of foreign banks with significant U.S. operations perhaps led to a downward revision in earnings estimates.

Continued Economic Growth to Bolster Financials

As fears of stagnation in the global economy is now a thing of the past, the stage is set for foreign banks to capitalize on any progress that the global economy witnesses.

IHS Markit expects the global economy to maintain 2017’s 3.2% growth rate this year. While economic growth in Eurozone and Japan is expected to soften in 2018, there is no chance of stagnation. In fact, Eurozone’s expansion is expected to remain solid.

While chances of the European Central Bank raising interest rates by the end of 2018 are dim due to still-low inflation, any further loosening of its monetary policy is not expected. So, European banks may not benefit from the rate environment any time soon, but they are well positioned to capitalize on the economic improvement.

In Japan, persistent weakness of yen will continue supporting exports and a steady growth in consumer spending will keep domestic demand resilient. However, lower chances of inflation reaching the central bank’s target level reduce the possibility of any change in the negative short-term interest rate environment.

China is expected to witness slower growth in 2018, as the government’s “Supply Side Structural Reform” might fall short in addressing the fundamental problems like excess industrial capacity, housing glut and debt overhang. Now, the rising rate environment in the U.S. could create growth headwinds for China due to significant capital outflow from the economy. So the Chinese central bank has been raising benchmark rates in response to the U.S. moves in an effort to conserve foreign reserves. Currently, the rate environment is not so unfavorable for its banks. However, the economy’s credit vulnerability could be risky for its banking system.

As the pace of interest rate hike in the United States is expected to increase and the dollar will strengthen due to the tax overhaul, emerging and developing economies are expected to witness significant capital outflows. However, some support is expected from the rising prices of commodities that many of these economies export. This, along with a sustained pickup in activities in these economies, should help their banks prosper.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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