Despite showing signs of stability, the U.S. banking industry currently faces the challenges of higher deposit costs, the risk of a potential default on commercial real estate (CRE) loans, and rating downgrade by top rating agencies.
Considering these factors, it could be wise to look beyond borders and invest in fundamentally soaring foreign bank stocks Commerzbank AG (CRZBY – Get Rating), Intesa Sanpaolo S.p.A. (ISNPY – Get Rating), and Banco BBVA Argentina S.A. (BBAR – Get Rating).
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.
The failure of the three regional banks earlier this year had shaken up the U.S. banking industry. Despite successfully mitigating the outflow of deposits from banks, the sector currently faces the challenges of higher borrowing costs, rising deposit costs, and rating downgrades. The U.S. banking industry also faces the prospect of maintaining higher capital levels, which could dent future earnings.
In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrade 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.
The rating downgrades are primarily due to the benchmark interest rates at their highest level in 22 years. Although the Fed opted to hold interest rates steady last week, it signaled another rate hike later this year in order to bring inflation to its 2% target.
The high-interest rates have raised the deposit costs for banks. Also, higher interest rates and stricter lending standards make it difficult for borrowers to get loans. With interest rates unlikely to be cut in the near term, loan growth could remain under pressure. Further rating downgrades could exacerbate the U.S. banking sector’s operating environment, leading to higher borrowing costs and even stricter lending standards.
However, foreign banks could continue to…
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