Recent changes to both U.S. tax and banking laws suggest international bank stocks could become more attractive to investors on this side of the pond.
Foreign banks are ramping up their commercial real estate lending, and while not every bank is increasing their U.S. activities, some certainly will. That in itself is a big reason to at least consider investing in some of these bank stocks.
An even better reason to consider investing in international bank stocks: Banks everywhere are cheap, dirt cheap, but coming on strong. In March, the Financial Select Sector SPDR Fund (XLF) is up 5.3% through March 24.
Bank stocks everywhere have been battered and bruised over the past year. For those prepared to wander off the straight and narrow, these three foreign banks are the stocks to buy now.
Bank Stocks to Buy Now: Itau Unibanco Holding SA (ADR) (ITUB)
Itau Unibanco Holding SA (ITUB) is the biggest of my three choices, and possibly the riskiest. With a current market cap of $52 billion, ITUB is Brazil’s largest private sector bank. Unfortunately, Brazil is in the middle of a recession.
Making matters worse, President Rousseff is embroiled in a corruption scandal involving former President Luiz Inácio Lula da Silva that could result in the impeachment of Brazil’s first woman elected president. It’s a mess, to say the least.
As Baron Rothschild once said, “The time to buy is when there’s blood in the streets.” Seeking Alpha contributor Zachary Polaski suggests that what’s happening now is very much like what happened in Brazil in 2002. Those with the stones to invest back then did very well indeed. While I couldn’t tell you whether he’s right or wrong about the similarities I will say this: Opportunity often comes disguised as crisis and dissension.
ITUB is the 27th largest bank in the world according to market cap. That puts it on par with Morgan Stanley (MS) and Bank of Nova Scotia (BNS) (one of Canada’s big six) and larger than Barclays PLC (BCS), which is one of Britain’s biggest financial institutions. By any standard, it’s a big bank.
Itau CEO Roberto Setubal spent much of the Q4 conference call with analysts explaining how delinquencies were going to increase significantly in 2016 and with that its return on equity would come in around 18%, much less than the 24% it achieved in 2015. However, it’s then expected to return to 20%-plus in 2017 and beyond. Keeping its dividend payout between 30-35% in the coming year, Setubal believes buybacks are warranted given its low share price.
But here’s the risk.
ITUB stock over the past five years has a negative annualized return of 7.1% compared to 12.3% for the S&P 500. That’s a huge difference. However, reversion to the mean suggests that its 30% increase year-to-date is a sign that its stock is picking itself off the mat, dusting itself off and moving ahead despite the issues Brazil faces.
In terms of valuation, with the exception of 2015 when it was even cheaper, ITUB stock hasn’t been this attractive in over a decade. If you can stomach all the political unrest, an investment now could end up smelling like roses this time next year.
Bank Stocks to Buy Now: HDFC Bank Limited (ADR) (HDB)
Almost as large as Itau Unibanco, India’s HDFC Bank Limited (HDB) hasn’t had nearly as good a start in 2016, down 5% year-to-date. However, it’s seriously outperformed the S&P 500 over the long term, beating it by 184 basis points on an annualized basis over the past five years. It’s been a winner amongst the Brazil, Russia, India and China banks.
Artisan Partners portfolio manager Lewis Kaufman is a big believer in the Indian Bank.
Recently Kaufman discussed HDFC’s simple approach to its business, which is to stick with what it’s good at — retail banking.
“ICICI Bank Ltd (IBN) ran into a little bit of difficulty with the global financial crisis and had to re-tranche on its branch expansion during that period,” wrote Kaufman in TWST.com. HDFC Bank continued to invest in branches, and when the economy recovered in 2010 to 2011, it was able to grow at a very favorable rate.”
Kaufman goes on to suggest that HDB stock is a good one because the bank invests in its business in both good times and bad; meaning when things get better after periods of economic slowdown, its business model is ready to take advantage of the rebounding economy. That’s happening now.
With almost a billion people in India and many of them still not part of the banking system there, HDFC has a huge opportunity, as do investors.
Bank Stocks to Buy Now: iShares S&P Global Financials Sect.(ETF) (IXG)
I thought about including a Chinese bank in the mix to make this an all-BRIC affair, but decided any international play on banks should include countries such as Canada, Australia and the UK.
Therefore, for a third choice, I’m actually recommending the iShares S&P Global Financials Sect. ETF (IXG), which while down 8.5% year-to-date, is up 6% on the month.
Not only does it invest in big banks in all three of these countries (21% weighting), it also keeps 46% right here in the U.S.
If you believe in a global portfolio, this exchange-traded fund is much more appropriate than the XLF.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.