2023 was a challenging year for U.S. banks as they faced various operational and macroeconomic challenges. Despite expectations of three rate cuts this year, interest rates will likely remain reasonably high. This could continue to affect the profitability of U.S. banks. Moreover, a weak economy, deterioration of asset quality, and the likelihood of default on commercial real estate (CRE) loans could put pressure on the U.S. banking system.
Amid this backdrop, it could be wise to look beyond borders and invest in fundamentally strong foreign banking names Banco Bilbao Vizcaya Argentaria, S.A. (BBVA – Get Rating), Banco do Brasil S.A. (BDORY – Get Rating), KB Financial Group Inc. (KB – Get Rating), Banco Santander, S.A. (SAN – Get Rating), and Commerzbank AG (CRZBY – Get Rating) as they are insulated against the headwinds currently facing U.S. banks.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the industry.
Last year, the U.S. banking industry had to endure many challenges, including the failure of three regional banks, credit rating downgrades, higher deposit costs, stringent lending standards, and large deposit outflows. Banks whose businesses relied on mergers and initial public offerings were severely affected as higher interest rates, fears of a recession, and worsening geopolitical conditions affected deal-making on Wall Street.
Despite these challenges, top U.S. banks managed to report strong third-quarter results on the back of high-interest rates and increased write-offs. Although the Fed has predicted three rate cuts this year, with the first one expected in March, if inflation surges again, the Fed might be forced to hold rates high for longer.
The Fed is expected to cut its key rate to around 3.75% by the end of 2024, but it will only fall to around 3% by the end of 2026 before rising back to around 3.5% after that. Interest rates remaining higher for longer could lead to businesses and consumers borrowing less while banks are forced to pay more for their funding. Moreover, it could also impact the market value of long-dated bonds which the banks are holding.
The sluggish economy, stringent lending standards, weakness in the commercial real estate (CRE) market, rising credit card debt, and reduced net interest income for banks mean that U.S. banks could continue to face headwinds this year.
Considering this backdrop, let’s take a look at the fundamentals of the…
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