Zacks Industry Outlook Highlights: Deutsche Bank, UBS, Barclays and HSBC Holdings

CHICAGO, Oct. 25, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Foreign Banks, including Deutsche Bank AG (NYSE:DB-Free Report), UBS AG (NYSE:UBS-Free Report), Barclays plc (NYSE:BCS-Free Report) and HSBC Holdings plc (NYSE:HBC-Free Report).

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Industry: Foreign Banks

Link:  http://www.zacks.com/commentary/29591/Foreign-Banks-Stock-Outlook---Oct.-2013

The turnaround in Europe and China as well as the stopgap political arrangement in the U.S. are widely spreading positivity, and the non-U.S. banking space is fast catching up. Of course, the improvement varies across locations depending on the ability to grab opportunities stemming from the wave of worldwide economic growth. But repositioning of business fundamentals to withstand any further crisis remains the trend.

Defensive and proactive steps taken by the central banks of most developed and emerging economies have helped non-U.S. banks remain on their growth trajectory so far in 2013. But the global financial system must gain strength for a long-term uptrend.

Policy makers' efforts to avoid another collapse have resulted in the flurry of banking regulations around the world. Of course this is taking a toll on banks' top and bottom lines, but the institutions are chalking out new strategies to counter regulatory burdens and plan future growth.

As capital efficiency is the key to survival, most foreign banks are adopting reconstruction-by-asset-sale strategies to strengthen capital ratios. So the prospects in the near to mid term look better but not impressive as the sector must continue to fight macroeconomic challenges which could keep growth muted.

Moreover, a prolonged low interest rate environment is not expected to reverse any time soon as central banks of most of the countries will continue to prioritize growth over inflation control. This strategy is sustainable as inflation is the concern of only a few emerging economies.

Thus, banks operating in a low interest rate environment will not be able boost revenue through interest income. On the other hand, non-interest revenue sources will be limited by regulatory restrictions.

Banks in consumption-driven economies will not, however, face significant challenges related to interest income due to a not-too-low interest rate environment. Still-high inflation will continue to force the central banks of these economies to keep interest rates higher than the low-inflation economies. However, non-interest revenue challenges will persist for these banks as well.

Most of the major non-U.S. banks do not mind complying with stringent regulation, but it would make the optimization of business investments difficult for them. These banks must reassess and restructure their operating models to drive growth, but this will take its own time.

The Performance So Far This Year

The majority of non-U.S. mega banks are yet to report third-quarter 2013 results, but the first half of the year witnessed mixed performance by them. Primarily, legal woes weighed on the earnings of a few includingDeutsche Bank AG (NYSE:DB-Free Report) and UBS AG (NYSE:UBS-Free Report), while some other banks including Barclays plc (NYSE:BCS-Free Report) and HSBC Holdings plc (NYSE:HBC-Free Report) managed to evade regulatory challenges and came up with impressive results. However, most of the banks witnessed strong capital ratios and improved credit quality.

However, a risk-aversion tendency has kept client activity restrained, resulting in weak trading volumes and subdued loan demand. Also, learning from past experience, banks are now more cautious about lending money.

But thanks to worldwide regulatory reform, the sector has at least entered into a transformation phase though an essence of growth is still to be felt.

What to Expect Moving Forward?

Growing challenges related to funding, still-high costs despite belt-tightening through layoffs and other measures, and limited access to revenue sources will keep bottom-line improvement under pressure in the upcoming quarters.

The growth potential of some non-U.S. banks could also be restrained by higher globally agreed reserve requirements and outsized losses related to capital markets. Consequently, valuation multiples of these banks will continue to reflect the fundamental challenges at least through the first half of 2014.

Nonetheless, strict lending limits as well as greater transparency in regulations could strengthen the fundamentals of many sector participants. Eventually, these are expected to create a less risky lane for the overall industry.

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