The U.S. banking industry finds itself in a spot of bother after major credit rating agencies downgraded multiple banks. This has put banking stocks under pressure lately.
Amid the uncertainty lingering around the stability of the U.S. banking sector, it could be wise to look beyond borders and invest in fundamentally strong foreign banking names KB Financial Group Inc. (KB – Get Rating), Commerzbank AG (CRZBY – Get Rating), and Erste Group Bank AG (EBKDY – Get Rating) as they are insulated from the troubles in the U.S. banking sector.
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 prudent to buy foreign bank stocks.
Higher borrowing costs, large deposit outflows, and elevated interest rates have tested the U.S. banking sector’s strength. Credit rating agencies have been cutting credit ratings of some banks due to concerns over their financial health. Many of these banks have exposure to commercial real estate (CRE), which faces the risk of default.
In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrades of America’s biggest banks. Earlier this month, Moody’s downgraded ten 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.
Zacks Investment Management client portfolio manager Brian Mulberry said, “These downgrades are mainly focused on the liquidity concerns now raised by multiple agencies where banks have a lot of loan portfolios that are only drawing 2.5-4.5% in interest income while now needing to pay depositors 4.5-5.5% in savings and money market accounts.”
The bank downgrades are primarily due to the benchmark interest rates, which are at their highest level in 22 years. The high-interest rates have increased the deposit costs for banks. Higher interest rates and stricter lending standards make it difficult for borrowers to…
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