Overseas banks are at a positive inflection point, and the group is expected to benefit significantly from positive earnings momentum, higher bond yields, still benign credit cycle, stronger capital bases and regulatory tailwinds.
In this article we look at four overseas banks our investment committee believe have a positive outlook.
ICICI Bank (NYSE: IBN)
ICICI Bank, India’s second-largest private sector bank, has launched a paperless home loan or “instant home loan” with which customers can borrow up to Rs 1 crore (US$10,000).
“The first service - called ‘Instant Home Loan’, enables pre-approved salaried customers of the Bank to avail final sanction letter digitally and instantly for loans upto Rs 1 crore for a tenure of up to 30 years (based on the age of the customer) using the Bank’s internet banking facility,” ICICI Bank said. ICICI Bank instant home loan facility enables customers to get the “final sanction” letter for new home loans instantaneously and allows existing customers to take a top-up loan and receive the money in their account immediately.
According to ICICI Bank, customers will be no longer be required to visit bank branches to submit the physical documents like application forms, KYC or income documents. The final sanction letter of the home loan, which is delivered instantly from the bank to the customer’s registered email, is valid for six months. However, for the disbursal of the home loan, the borrower needs to visit the nearest branch or contact the assigned relationship manager with the sanction letter and the documents of the home he/she wants to purchase, ICICI Bank said.
Citibank (NYSE: C)
Citibank reported 1Q 2019 earnings on 15 April 2019. The bank posted a quarterly profit of $4.7 billion, or $1.87 a share. Analysts had expected $1.80 a share. Revenue was $18.6 billion, down 2% from $18.9 billion a year ago - in line with consensus. First-quarter trading revenue at the bank fell 5% to $4.3 billion.
Citigroup and other banks have warned that trading activity in early 2019 still hasn’t rebounded after falling away at the end of 2018. However, Citigroup did better than rivals in the first quarter. Trading revenue at Goldman Sachs and JPMorgan Chase was down 17% Y/Y. To its credit, Citigroup’s large fixed-income business actually rose 1% Y/Y to $3.5 billion. A bright spot was investment banking revenue rising 20% from a year ago, to $1.4 billion, helped in part by a 76% surge in mergers-and-acquisitions advisory revenue. YTD Citi is one of the best performing US banks, up 29% as of 16 April 2019.
Societe Generale (EPA: GLE)
While we are not happy with Societe Generale’s 12 month performance, SocGen is one of the cheapest European banks trading at 6x 2019 earnings per share (EPS), 0.5x net asset value (NAV) and yields 8.4%. The dividend appears to be safe.
In February the company announced a recalibration (lowering) of 2019 targets. SG guides to a higher cost of risk of 25-30bp vs. 21bp in 2018. The group also expects an improving revenue outlook in 2019 for French retail, compared to the -1.8% YoY revenue decline in 2018, driven in part by fees generation. The bank’s 2020 group return on tangible equity (ROTE) target has been revised to 9-10% from 11.5% previously. SG revised the ROTE target mainly as a result of the weaker macro/rates environment which impacts the 2020 group revenues by €500m. This would imply a revised revenue target of some €28bn in 2020. SG is also revising its cost savings target by €500m in Global Banking & Investor Solution (GBIS), and group cost savings are now increasing from €1.1bn to €1.6bn by 2020, of which €0.4bn has already been realised. In GBIS, SG now targets a cost base of €6.8bn in 2020 vs. €7.3bn previously.
Not surprisingly, SG announced on April 3 a firm-wide restructuring whereby it plans to cut nearly 1,600 jobs globally after a slump in investment banking revenue in the fourth quarter. The job cuts at Société Générale come as all the European investment banks have experienced a particularly tough first quarter with numerous economic and political challenges forcing companies reluctant to pursue deals or raise money. Société Générale said it plans to refocus on its equity derivatives and structured products units, close its over-the-counter commodities business and stop proprietary trading entirely. The bank said it would also restructure its rates, credit, currencies and prime services businesses, along with its asset and wealth management unit, to make them more profitable.
Sberbank (LSE: SBER)
Sberbank’s underperformance, while disappointing over the last 12 months, is unlikely to continue in 2019 given its most recent earnings report.
On April 5 2019 Sberbank reported a 1Q19 net profit of RUB 218bn (ROE of 22.3%) or 11% higher Y/Y. Earnings growth Y/Y was primarily driven by lower provisioning and that’s a positive. The report was marked by an improvement in core revenue (net interest income + fees) growth (+10% mom) offset by a trading loss of RUB 4bn. Managements’ comment in the release that “the bank is finalising adjustment to the new interest-rate environment” suggests that the net interest margin (NIM) decline is close to trough levels. Actually NIM on average assets improved to 4.58% in March from 4.14% in February and was slightly better than the January figure of 4.57%.
OPEX grew 6% Y/Y in 1Q19 and 19% mom in March 2019. Despite strong M/M cost growth in March the 1Q19 cost/income ratio stood at a respectable 31.2%. In terms of asset quality, non-performing loans (NPLs) declined RUB 23bn and the NPL ratio declined to 2.45% in March from 2.56% in February. Loans grew 13.8% Y/Y but contracted slightly in March vs. February (-0.2% mom) driven by a 1% mom decline in corporate loans. Retail loan growth was a strong 24% Y/Y which outpaced corporate lending (+9% Y/Y). Sberbank’s shares have had a strong recovery YTD up 37% (as of 16 April 2019).
You can invest in these companies directly through Macrovue's Bank on It share portfolio.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.
Past performance is not a reliable indicator of future performance.