Banks World-Wide Feeling The Impact Of The US Financial Crisis

To find out how the U.S. financial crisis is beginning to play out in foreign markets, we spoke late last week with Zacks senior analyst Ann Heffron, CFA recently about how banks around the world under her coverage are currently being affected.

To what extent do you feel the U.S. economic slowdown has affected foreign banks in Europe at this time?

The US economic slowdown has hurt European banks immensely, for a couple of reasons. First, many European banks conduct a significant portion of their business in the US. Second, the slowdown in the US is spreading to Europe and the UK, and these countries are experiencing the same types of problems as in the US.

For example, Britain, Ireland, and Spain are witnessing a substantial contraction in their housing markets, which has pushed both sales and pricing into negative territory. This is particularly problematic for Spain and Ireland, where residential investment accounts for 9% and 12% of their economies, respectively, compared to 5% in Britain and 4% in the United States. This is now spreading to other parts of the economy, with the result that GDP is expected to slow.

The European Commission (EC) recently announced that Germany, Spain, and the UK economies would fall into recession this year. The German economy, the largest in euro zone, contracted 0.5% in the second quarter and the EC forecast negative growth of 0.2% for the third quarter. Spain is forecast to record negative growths of 0.1% and 0.3% in the third and fourth quarters, respectively. The UK economy is also expected to experience contractions of 0.2% each in the third and fourth quarters of 2008.

From a broader perspective, the EC forecast gross domestic product growth of 1.3% for this year in the Euro Zone, down from 1.7% previously when the EC saw no risk of recession in Europe. The EC forecast growth of 1.4% for the broader EU, which includes Britain, Sweden, Denmark and several countries in the formerly communist eastern Europe, down from 2.0% before.

This has been reflected in stock prices. For non-US banks in the Zacks universe, the median price decline year to date is 26.7% compared to a 14.9% decrease for the S&P 500. For European and UK banks only in the Zacks universe, the price drop is even worse at 38.0%.

Asia of course is boasting continually strong economic growth. Of the Asian banks under your coverage, which are benefiting most from this?

While it is true that certain Asian economies continue to grow at a reasonable pace, they are still experiencing slowdowns relative to recent growth in their economies. Others are not growing at all. For example, the Reserve Bank of India, expects GDP growth in India to fall to around 8% in fiscal 2009 (ending March) from 9% in fiscal 2008.

In Japan, the economy contracted 0.7% in the 2008 April-June quarter, translating into an annualized drop of 3.0%. This decline reflected sluggish exports and slowing corporate capital spending.

As to stock performance, Asian banks in the Zacks universe experienced a median year-to-date 26.5% decrease, with banks in India down 42.0% year to date and the banks in Japan down 16.3%.

Another strong growth area is Latin America. Do you see banks strengthening following Brazil’s upgrade to investment-level status?

Ironically, since Brazil was upgraded to investment grade by Standard & Poor’s on April 30, 2008 (followed by Fitch on May 30, 2008), the stock market has tanked. The BOVESPA index in Brazil has slumped 24.5% since April 30, while the S&P 500 is down only 9.9% over the same period. This reflects declining commodity prices, risk aversion to emerging markets in general, and global economic slowing.

For Latin American banks in the Zacks universe, the median stock price decline year to date is 21.4%, compared to 14.9% for the S&P 500.

In time, we believe that the upgrade to investment grade will be helpful to Brazil and Brazilian banks. However, this is currently being overshadowed by events on the global stage.

Overall, which are your top Buys/Sells these days?

I have two Buys: Banco Santander Central Hispano, S.A. (STD) and Unibanco - Uniao de Bancos Brasileiros S.A. (UBB).

Banco Santander Central Hispano, S.A. is the largest bank in the euro zone and the fifth largest in the world, based upon profit. Santander had total assets of €913 billion (US$1.3 trillion) in assets as of December 31, 2007, and is among the highest-rated banks in the world following recent credit rating upgrades. Banco Santander’s long-term credit ratings are AA by S&P and Fitch and Aa1 by Moody’s. We believe that Santander’s valuation is lower than it should be given its strong growth prospects relative to global peers.

Unibanco - Uniao de Bancos Brasileiros S.A. is Brazil’s fourth largest private bank, with total assets of R$150 billion (US$84 billion) at December 31, 2007. The bank offers a diverse array of products and services. Unibanco’s long-term credit ratings are Baa3 by Moody’s, BBB- by Standard & Poor’s, and BBB- by Fitch. UBB represents a good value relative to its strong growth prospects and also vis-à-vis Brazilian peers, Banco Itau (ITU) and Banco Bradesco (BBD).

Ann Heffron, CFA is a senior analyst covering foreign financial institutions for Zacks Equity Research.

Subscribe by RSS Subscribe by Email

Comment by Ann

2008-09-27 08:57:15

The U.S. financial crisis and its impact on the UK; does this also apply to the offshore banking, i.e. Channel Islands, Isle of Man, Jersey, etc. whether it be a British bank, Canadian bank, etc? As there is no deposit insurance coverage for offshore accounts, is there a high risk of the monies being lost? And what would be the best option of where to keep these funds, and to have them insured?

Reply to this comment