2 Foreign Banks Poised to Beat Earnings - Earnings ESP

2 Foreign Banks Poised to Beat Earnings

 

The non-U.S banks saw a dull start to the year 2014, with some of the major economies failing to keep up with the pace of the prior-year recovery rate. Erratic investor behavior kept the equity markets volatile during the first quarter of the year. The aggravated geopolitical issues further worsened the overall scenario. 

 

While the major developed nations coped with sluggish economic recovery, low interest rates prevailed. Therefore, interest income as well as margin of the non-U.S. banks operating in these regions remained under pressure.

 

Adding to the woes, growth in the emerging economies was impeded during the quarter. The initiation of Fed tapering earlier this year led to withdrawal of the infused capital from these economies, thereby impacting the capital flexibility of banks.

 

Nonetheless, the interest rate scenario in the emerging economies was comparatively better, helping resident banks keep the flow of interest income. We expect moderate growth in interest income to partially ease the pressure on top line in the upcoming quarters.

 

Moreover, irrespective of the nature of economy, we find the policymakers worldwide adopting stringent banking regulations to avoid the recurrence of a financial meltdown. These financial regulations will continue to constrain lending as well as investment activities of the worldwide banking industry.

 

Despite the negatives, if you are still interested in foreign banks to take advantage of the cheap valuation, you may consider the ones that are yet to release earnings and have the potential to beat estimates. An earnings beat would raise investors' confidence and lead to rapid price appreciation. 

 

The Way to Select Right Stocks

 

Choosing the right stocks could be quite difficult unless one knows the method. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

 

Earnings ESP is our proprietary methodology for identifying stocks that have the best chances to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

 

Our research shows that for stocks with this combination, chance of a positive earnings surprise are as high as 70%.

 

Here are two banking stocks having the right combination of elements to deliver an earnings beat when they release their earnings later this week:

 

The Bank of Nova Scotia BNS carries a Zacks Rank #3 and has an earnings ESP of +1.67%. The Zacks Consensus Estimate for fiscal second-quarter 2014 is $1.20 per share.

 

Based in Toronto, CN, it is one of North America's premier financial institutions. It offers a diverse range of products and services including personal, commercial, corporate, as well as investment banking. 

 

--The Bank of Nova Scotia is scheduled to report its results before the opening bell on May 27.

 

Royal Bank of Canada RY has a Zacks Rank #3 and an earnings ESP of +1.56%. The Zacks Consensus Estimate for fiscal second-quarter 2014 is $1.28 per share.

 

It is based in Toronto, CN and provides personal and commercial banking, wealth management services, insurance, corporate and investment banking and transaction processing services on a global basis. 

 

The company has registered an average positive earnings surprise of 3.5% over the trailing four quarters.

 

--Royal Bank of Canada will announce its results before the opening bell on May 22.

 

Going forward

 

The corrective measures adopted by policy makers across nations require the foreign banks to meet higher capital requirements in their home economy as well as in the U.S. The stringent regulations will result in higher compliance and legal expenditures thereby weighing on the banks' profitability.

 

However, the global banking system will be better positioned to endure financially stressful conditions due to these measures. Moreover, as the global economic space stabilizes, renewed investor confidence as well as improvement in trading activities will act as growth propellants for non-U.S. banks.

 

The current growth path, though sluggish, is headed towards a more sustainable economy. Most of the developed nations are out of recession and Euro zone too reflects a steady recovery.