The Federal Reserve’s aggressive interest rate hikes since last year to control inflation put immense pressure on the U.S. banking system, leading to the failure of three large regional banks earlier this year. These bank failures were the biggest since the global financial crisis of 2008.
Despite the measures taken by the financial regulators to restore stability to the banking system, investors and depositors are still concerned about the strength of the financial system. Amid this backdrop, it could be wise to add fundamentally strong foreign bank stocks Deutsche Bank Aktiengesellschaft (DB), Erste Group Bank AG (EBKDY), and Woori Financial Group Inc. (WF) to one’s watchlist.
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 add these foreign bank stocks to one’s watchlist.
The failures of Silicon Valley Bank, Signature Bank, and the First Republic Bank were largely due to depositors’ lack of confidence in their ability to stay afloat. Investors took their deposits out in a hurry, causing a bank run. According to the Federal Deposit Insurance Corporation (FDIC), U.S. banks lost $472 billion in deposits during the first quarter.
Depositors withdrew their deposits and deposited them into large banks and higher-yielding money market funds. In a client note, Deutsche Bank analysts said, “Our baseline does not anticipate a further intensification of banking stresses.” However, for the week ended June 7, 2023, total money market fund assets increased by $36.63 billion to $5.46 trillion. Money flows into money market funds indicate that concerns over the banking system’s stability are yet to ease.
U.S. banks are also highly likely to face regulatory challenges like increased capital requirements, heightened supervision, stricter risk management, increased disclosure, etc. Tighter credit standards are also expected to lead to an increase in their operational costs and reduce their lending volumes, piling further pressure on their profitability.
Fitch Ratings expects weaker financial performance for U.S. banks in 2023. Considering these factors, it could be wise to add the featured foreign banking names to one’s watchlist to benefit from more stable industry conditions in their respective economies.
Let’s take a closer look at their fundamentals.
Deutsche Bank Aktiengesellschaft (DB)
Based in Frankfurt am Main, Germany, DB provides corporate and investment banking and asset management products and services to private clients, corporate entities, and institutional clients worldwide. It operates through the Corporate Bank, Private Bank, and Asset Management segments.
In terms of forward non-GAAP P/E, DB’s 5.38x is 41.4% lower than the 9.19x industry average. Its 0.71x forward Price/Sales is 68.6% lower than the 2.25x industry average. Likewise, its 0.28x trailing-12-month Price/Book is 73.3% lower than the 1.05x industry average.
For the first quarter ended March 31, 2023, DB’s net interest income increased 19% year-over-year to €3.42 billion ($3.69 billion). Its net revenue increased 4.8% year-over-year to €7.68 billion ($8.29 billion). The company’s profit attributable to DB shareholders rose 9.2% year-over-year to €1.30 billion ($1.40 billion). Also, its EPS came in at €0.61, representing an increase of 10.9% year-over-year.
For the quarter ending June 30, 2023, DB’s revenue is expected to increase 13.5% year-over-year to $7.70 billion. Its EPS for fiscal 2023 is expected to increase 7.9% year-over-year to $1.97. Over the past nine months, the stock has gained 18.4% to close the last trading session at $10.63.
DB’s POWR Ratings reflect this positive outlook. DB 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.
It is ranked #11 out of 89 stocks in the Foreign Banks industry. It has a B grade for Value and Momentum. To see the other ratings of DB for Growth, Stability, Sentiment, and Quality, click here.
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 5.25x is 45.3% lower than the 9.59x industry average. Its 1.29x forward Price/Sales is 42.9% lower than the 2.25x industry average. Likewise, its 0.63x trailing-12-month Price/Book is 39.3% lower than the 1.05x industry average.
EBKDY’s net interest income for the first quarter ended March 31, 2023, increased 27.1% year-over-year to €1.77 billion ($1.91 billion). Its net result attributable to owners of the parent increased 3.3% year-over-year to €593.60 million ($640.48 million). The company’s operating result rose 56.9% year-over-year to €1.26 billion ($1.36 billion). Its CET1 ratio came in at 14%, compared to 13.7% in the year-ago quarter.
Analysts expect EBKDY’s revenue for the quarter ending June 30, 2023, to increase 27.5% year-over-year to $2.76 billion. Its EPS for fiscal 2023 is expected to increase 24.1% year-over-year to $3.26. Over the past nine months, the stock has gained 35.4% to close the last trading session at $17.09.
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 #10 in the same industry. It has a B grade for Value, Momentum, Stability, and Sentiment. Click here to see the other ratings of EBKDY for Growth and Quality.
Woori Financial Group Inc. (WF)
WF operates as a commercial bank that provides a range of financial services to individual, business, and institutional customers in Korea. It operates in Banking, Credit Card, Capital, Investment Banking, and Others segments. The company offers savings, demand, and installment deposits, time deposits, and certificates of deposit. It is based in Seoul, South Korea.
In terms of forward non-GAAP P/E, WF’s 3.07x is 66.5% lower than the 9.19x industry average. Likewise, its 0.88x forward Price/Sales is 61% lower than the 2.25x industry average.
WF’s net operating revenue for the first quarter ended March 31, 2023, increased 7.6% year-over-year to ₩2.55 trillion ($2 billion). The company’s net income rose 8.2% over the prior-year quarter to ₩944 billion ($741.37 million). Its operating income increased 1.9% year-over-year to ₩1.25 trillion ($980 million).
Street expects WF’s EPS and revenue for fiscal 2024 to increase 3.7% and 2.7% year-over-year to $9.61 and $8 billion, respectively. Over the past nine months, the stock has gained 16% to close the last trading session at $28.51.
WF’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 #7 in the Foreign Banks industry. It has an A grade for Value and a B for Momentum and Stability. Click here to see the other ratings of WF for Growth, Sentiment, and Quality.
What To Do Next?
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DB shares rose $0.17 (+1.60%) in premarket trading Wednesday. Year-to-date, DB has declined -3.27%, versus a 14.77% 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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