The troubles of the U.S. banking industry are well known. Although the high benchmark interest rates are boosting U.S. banks' net interest income (NII) and net interest margin (NIM), loan growth has been slowing down as borrowing has become expensive. The industry also faces the challenges of rising deposit costs, rising treasury yields, stricter lending norms, credit rating downgrades, etc.

Considering these factors, investors could look beyond boundaries for sustainable profits. To that end, it could be wise to buy fundamentally strong foreign bank stocks Barclays PLC (BCS), Agricultural Bank of China Limited (ACGBY), and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA).

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 judicious to buy foreign bank stocks.

There have been plenty of challenges for the U.S. banking industry this year. After a short-lived recovery in market sentiment following the failure of the three regional banks, the U.S. banking industry is facing a slowdown in lending due to rising benchmark interest rates.

Corporate borrowing has fallen in the past six months. Moreover, banks will likely see squeezed profit margins due to rising deposit costs. U.S. banks have to pay higher rates on savings so that their customers do not take out their deposits, which is the bank’s primary funding source, in search of higher returns.

In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrades of America’s biggest banks. Meanwhile, Moody’s downgraded 10 banks and put six others on notice. The S&P Global followed Moody’s to downgrade five U.S. banks while putting two others on notice.

With the U.S. economy adding higher-than-expected jobs in September and retail sales rising 0.7% in September, more than twice what economists had expected, the Fed will likely hike interest rates again this year.

With interest rates unlikely to be cut in the near term, loan growth could remain under pressure. Additionally, further rating downgrades arising from concerns over the high-interest rate environment could exacerbate the U.S. banking sector’s operating environment, leading to higher borrowing costs and even stricter lending standards.

On the contrary, foreign banks could continue to reap the benefits of the higher interest rate environment in their home countries.

Considering this backdrop, let's take a look at the fundamentals of the three Foreign Banks stock picks, beginning with number 3.

Stock #3: Barclays PLC (BCS)

Headquartered in London, the United Kingdom, BCS provides various financial services in the United Kingdom, Europe, the Americas, Africa, the Middle East, and Asia. The company operates through two segments, Barclays UK and Barclays International divisions. It offers financial services, such as retail banking, credit cards, wholesale banking, investment banking, wealth management, and investment management services.

On April 24, 2023, BCS announced a strategic partnership with British Gas. The partnership was launched with an offer of a 50% discount on a Hive Thermostat Mini for Barclays UK residential mortgage customers.

Barclays UK’s Head of Sustainability, Nick Stace, said, “We want it to be easier and more affordable for customers to make their homes more efficient. Offering the Hive Thermostat Mini at a discount is one way we can do this for our UK residential mortgage customers, alongside our Greener Home Reward, which provides a cash reward of up to £2,000 towards the cost of making bigger energy efficiency-related home improvements.”

In terms of forward non-GAAP P/E, BCS’ 5.13x is 42.6% lower than the 8.94x industry average. Its 0.90x forward Price/Sales is 59.4% lower than the 2.23x industry average. Likewise, its 0.43x trailing-12-month Price/Book is 57.6% lower than the 1.01x industry average.

BCS’ total income for half the year ended June 30, 2023, increased 2.4% year-over-year to £13.52 billion ($16.47 billion). Its profit after tax increased 25.4% over the prior-year period to £3.65 billion ($4.45 billion). In addition, its attributable profit increased 25.7% year-over-year to £3.11 billion ($3.79 billion).

Its EPS came in at 19.9p, representing an increase of 34.5% year-over-year. Also, its return on average tangible shareholders’ equity came in at 13.2%, compared to 10.1% in the prior year period.

Analysts expect BCS’ revenue for the quarter ended September 30, 2023, to increase 8.5% year-over-year to $7.51 billion. Its EPS for fiscal 2024 is expected to increase 16.1% year-over-year to $1.72. Over the past year, the stock has gained 14% to close the last trading session at $7.59.

BCS’ POWR Ratings reflect this positive outlook. BCS 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 #15 out of 89 stocks in the Foreign Banks industry. It has a B grade for Value, Momentum, and Sentiment. Click here to see the other ratings of BCS for Growth, Stability, and Quality.

Stock #2: Agricultural Bank of China Limited (ACGBY)

Headquartered in Beijing, the People’s Republic of China, ACGBY provides banking products and services. The company operates through Corporate Banking, Personal Banking, and Treasury Operations segments. It offers demand, personal call, currency call, time or demand optional, foreign exchange call, savings, agreed-term and negotiated deposit accounts, certificates of deposit, and loans.

In terms of forward Price/Sales, ACGBY’s 1.34x is 39.7% lower than the 2.23x industry average. Its 3.94x trailing-12-month GAAP P/E is 57.2% lower than the 9.19x industry average. Likewise, its 0.43x trailing-12-month Price/Book is 57.7% lower than the 1.01x industry average.

For the six months ended June 30, 2023, ACGBY’s net interest income came in at RMB290.42 billion ($39.70 billion). Its net fee and commission income rose 2.5% year-over-year to RMB50.73 billion ($6.94 billion). The company’s operating income rose 0.7% year-over-year to RMB365.79 billion ($50.01 billion). Also, its net profit increased 3.9% year-over-year to RMB133.83 billion ($18.30 billion).

For the quarter ending December 31, 2023, ACGBY’s revenue is expected to increase 1.1% year-over-year to $23.56 billion. Its EPS for fiscal 2024 is expected to increase 5.6% year-over-year to $106.11 billion. Over the past year, the stock has gained 28.5% to close the last trading session at $9.51.

ACGBY’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system.

It is ranked #7 in the same industry. It has an A grade for Stability and a B for Value and Momentum. To see the other ratings of ACGBY for Growth, Sentiment, and Quality, click here.

Stock #1: Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)

Headquartered in Bilbao, Spain, BBVA provides retail banking, wholesale banking, and asset management services. It offers current accounts; and demand, savings, overnight, time, term, and subordinated deposits. The company also provides loan products, deals in securities; leasing, factoring, brokerage, and asset management services; and manages pension and investment funds.

In terms of forward non-GAAP P/E, BBVA’s 5.97x is 33.2% lower than the 8.94x industry average. Its 0.46x forward non-GAAP PEG is 61.2% lower than the 1.19x industry average. Likewise, its 0.92x forward Price/Book is 7% lower than the 0.99x industry average.

BBVA’s net interest income for six months ended June 30, 2023, increased 33.6% year-over-year to €11.41 billion ($12.05 billion). Its gross income rose 23.9% year-over-year to €14.15 billion ($14.94 billion). The company’s net operating income increased 28.4% year-over-year to €8.21 billion ($8.67 billion).

Also, its net attributable profit increased 31.1% year-over-year to €3.88 billion ($4.10 billion). In addition, its adjusted EPS came in at €0.63, representing an increase of 26% year-over-year.

Street expects BBVA’s revenue for the quarter ended September 30, 2023, to increase 13.3% year-over-year to $7.74 billion. Its EPS for fiscal 2024 is expected to increase 0.8% year-over-year to $1.34. Over the past year, the stock has gained 71.9% to close the last trading session at $8.20.

BBVA’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.

Within the Foreign Banks industry, it is ranked #4. It has a B grade for Growth, Momentum, and Stability. Click here to see the other ratings of BBVA for Value, Sentiment, and Quality.

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ACGBY shares were trading at $9.37 per share on Wednesday morning, down $0.14 (-1.47%). Year-to-date, ACGBY has gained 19.23%, versus a 14.63% rise in the benchmark S&P 500 index during the same period.

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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