Zacks Industry Outlook Highlights: Credit Suisse, BNP Paribas, Deutsche Bank, Royal Bank of Scotland Group and Moody's

CHICAGO, June 26, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Foreign Banks, including Credit Suisse (NYSE:CS-Free Report), BNP Paribas S.A. (OTC:BNPQY-Free Report), Deutsche Bank AG (NYSE:DB-Free Report), Royal Bank of Scotland Group Plc. (NYSE:RBS-Free Report) and Moody's Corp. (NYSE:MCO-Free Report).

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Industry: Foreign Banks

Link http://www.zacks.com/commentary/27875/foreign-banks-stock-outlook-june-2013

The key trouble for non-U.S. banks is regulatory pressure, which ensued from taxpayers' money and government intervention that were required for them to remain in business. The impact of regulations is yet to be fully felt with many rules still impending.

Additionally, government efforts to alleviate industry concerns have significantly raised political debates over time. Politics will continue to influence lending decisions as long as banks remain financially dependent on governments.

According to banking regulators, if governments withdraw their support from banks before giving them sufficient time to restore their financial strength, the sector could collapse again. The need for government backing is still felt acutely by the European banks.

Adding to the concern is the tendency of regulators worldwide to agree on strict capital standards to clip the risk-taking attitude of banks to prevent the recurrence of a global financial crisis. The introduction of Basel III standards is a case in point.

While the full implementation of the required capital levels under Basel III is due in 2018, many banks have already started complying with the requirements to fix their damaged reputation following a number of high-profile scandals in the industry. To make matters worse, the latest changes indicate that banks need to hold more capital compared to what the Basel Committee mandated initially.     

With these regulatory measures, the capital structure of banks will remain under constant pressure, though this would eventually make their balance sheets more recession-proof.

Valuations Look Attractive

Ongoing balance sheet repair and credit environment recovery will make the valuations of most of the non-U.S. bank stocks less expensive going forward. However, the mega banks, which can comfortably maintain the minimum capital norms mandated by the Basel Committee, will experience the fastest valuation upside. Consequently, we believe this would be a good time for long-term investors to add foreign bank stocks to their investment kitty.

Investors with short-term targets, however, should be watchful while choosing foreign bank stocks at this point as near-term fundamentals do not look promising. Asset quality lacks the potential to a rebound anytime soon as default rates for individuals and companies are not expected to materially subside, and revenue growth might remain weak with faltering loan growth and a low interest rate environment in most of the countries.

If any improvement occurs in the near-to-mid term, it will vary from country to country, depending on industry circumstances.

Mixed Rating Actions

Rating downgrades remained a major threat for global banks in 2012, but 2013 started off with better response from a few rating agencies on a few banks. Banks that showed improvement in liquidity, funding and capitalization earned positive rating actions.

In May 2013, Fitch Ratings affirmed its credit ratings on 12 global banks including non-U.S. banks like Barclays, Credit Suisse (NYSE:CS-Free Report), BNP Paribas S.A. (OTC:BNPQY-Free Report), Deutsche Bank AG (NYSE:DB-Free Report) and HSBC. The rating agency accounted for the solid progress made by banks to meet their regulatory capital ratio requirements.

However, in Jun 2013, Standard and Poor's (S&P) reduced its credit ratings on 15 big global banks including Barclays, HSBC, Royal Bank of Scotland Group Plc. (NYSE:RBS-Free Report) and UBS AG. A sweeping overhaul of the agency's ratings criteria resulted in these downgrades. Earlier, in Mar 2013, the rating agency put Deutsche Bank's long-term credit rating on negative watch following weak 2012 results.

According to Moody's Investors Service, the rating arm of Moody's Corp. (NYSE:MCO-Free Report), the ratings of global banks are expected to be relatively stable in 2013. The rating agency will keep an eye on excessive risk-taking by banks to offset the negative effects of low interest rates and regulatory reforms.    

Overall, the industry may witness more positive rating actions if banks can evade the lingering macroeconomic issues with their smartened up business models. 

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