4 International Banks to Consider

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It seems like every day when I open a magazine or newspaper there is some sort of article about the Government seeking to increase regulation over US Banks.

As a citizen, I find these efforts laudable. As an investor, however, they don’t make me want to invest in US banks. The push for new capital requirements, for instance, raises concern. In theory, imposing capital requirements on the banks should significantly reduce the probability that banks will need aid in a crisis. In reality, these rules not only create a significant burden for many of the largest banks but also have the potential to undermine the global competitiveness of our banks.

Increased governmental intervention and regulation is one of the many reasons why international banks are showing up on my radar. After considering dozens of banks, I have selected 4 banks to research further. I may initiate a modest long position in one or more of these banks.

An European bank with global reach

Banco Santander’s (NYSE: SAN) massive dividend yield, which was more than 10% not that long ago, caught my attention. In addition to its high yield, there are a number of things that I like about Banco Santander such as the fact that it has made a significant profit each of the past 10 years; that it has paid a dividend since September of 2006; that it trades at a price to book ratio of 0.77; its significant presence in Latin America; and that it has grown sales by more than 11%, on average, over the past 5 years. But there are also several things that make this stock risky such as Spain’s unemployment rate of more than 25% (the company is headquarter in Spain); a decline in net income of more than 20%, on average, over the past five years; and a recent, modest dividend cut. On April 15th, even though this company met earnings expectations of 18 cents per share, its stock price declined. That happened because analysts expected the company to either beat estimates or issue better guidance. Of concern is that intangible assets may account for roughly a third of stockholders’ equity and investors need to watch out for large asset write-downs. What’s more, Banco Santander has a weak net profit margin of roughly 2.5%, which contributes to a low return on equity and low profitability. On balance, it appears as though Banco Santander may need to re-evaluate its business model given its tough operating environment. Still, price matters and at around $6 per share the potential upside, which is not without considerable risk, makes this stock look moderately attractive.

A bank that offers income and growth

Bank of Nova Scotia’s (NYSE: BNS) forward price to earnings ratio of around 10 and its current dividend yield of more than 4% caught my attention given that it is headquartered in Canada. On the positive side, this bank has a relatively low price to earnings ratio; it pays a substantial dividend; it has grown both sales and net income by more than 9%, on average, over the past 5 years; it trades at a PEG ratio of approximately 1.1 vs. an average of 2.5 for regional banks; it appears to have very stable operations; it has diversified operations; and it has strong underlying fundamentals as shown by its net profit margin of roughly 30%, a comparatively high return on equity of 18.5% and strong profitability. On the negative side, this bank trades at a price to book ratio of 1.86, has a return of assets of 1.06 and it appears as though its growth may have slowed. Still, I feel that the Bank of Nova Scotia offers a reasonable upside of 10-15% over the next year with minimal downside risk.

A bank founded in 1817

Westpac Banking Corp’s (NYSE: WBK) dividend yield of more than 6% and the location of its headquarters (Australia) caught my attention. Australia has a very strong and stable economy. In fact, Australia has an unemployment rate of less than 6% and GDP growth that is significantly greater than ours. Furthermore, Westpac Banking has grown both revenues and net income by roughly 12%, on average, over the past five years; has a strong net profit margin of more than 34%; and its performance over the past 10 years suggest that its operations are not only very stable but also fairly predictable. On the other hand, growth has recently slowed; it trades at a price to book ratio of around 2; and some investors don’t like the fact that its share price is more than $100 even though that shouldn’t matter given that it trades at a reasonable price to earnings ratio. Overall, I like the fact that this is one of only four major banking operations in Australia as well as Westpac’s huge dividend of $8.77 per share and stable operations.

A diversified Dutch bank

ING Groep’s (NYSE: ING) strong brand recognition and low share price caught my attention. After taking a closer look, I like fact that ING trades at a price to earnings ratio of 7.7 (and trades at a forward price to earnings ratio of less than 7); its strong image, particularly in Europe; its improved profitability; that it trades at a price to book ratio of around 0.5; and its improved underlying financials. But I don’t like that its earnings have been erratic; its low return of equity of around 8%; that it currently does not appear to pay a dividend; its exposure to a portfolio of various insurance products; and the stock’s poor performance over the past several years. Considering everything, however, I feel that this stock has taken a beating and offers considerable upside potential. Of the 4 banks listed here, given my risk tolerance and familiarity with this Dutch bank (I lived in the Netherlands for about a month), this bank appears to not only have the most attractive valuation but also the most upside potential. 

3 factors to consider

1. Exposure to foreign markets. Often times we fail to look beyond the country in which a company is headquartered. We fail to recognize that the majority of its operations occur outside of the country.

2. International markets lag the US market. The majority of banks in the US are nearly fully valued whereas many banks outside of the United States are not. A broad global recovery could cause many banks based outside of the United States to spike.

3. Increased regulation. This also applies to companies outside of the United States, particularly those in Europe where Germany (the regional hegemon) may start to crack the whip.

My foolish take

I believe that there are a lot of international banks worth considering -- the banks in this article represent a fraction of those banks. Many banks are unfairly penalized for a variety of reasons such as the location of their headquarters, their association with the crisis in Europe or some other area, and/or investors’ lack of knowledge of a specific country or region. For different reasons, I believe that all of the banks above offer the potential for reasonable returns. If you are willing to assume a fair amount of risk, I suggest considering ING and Banco Santander. And if you want a more predictable return with less risk then consider Bank of Nova Scotia and Westpac Banking.


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