FR: 5 Foreign Banks Worth Considering

Article: 5 Foreign Banks Worth Considering

The next article in my “Fool Revisited” series is a bit of a departure from previous articles, and a theme you might see come back from time to time over the course of all these articles. It is, again, a sector piece, this time about banking, though instead of writing about U.S. banks, I decided to go off the beaten path a little bit and identify a handful of options from overseas.

It was the first article that I wrote using screening criteria, using some metrics that they presented to us in our class about banks. I chose the following criteria: a price-to book ratio under1.0, price-to-earnings ratio under 15, and a dividend yield over 4%. Also, after featuring a chart in my previous article, this was the first one with a table!!

This article was also the first time I ever wrote about banks, something that would become my regular “beat” once I started writing full-time for the Fool in 2012. You’ll see a lot of articles about banks of all sizes, including some banks so obscure that an article I wrote 5 years ago might still show up on a Yahoo! Finance feed (though this may have changed since the last time I looked). I really liked looking at banks as investments, and I still have some favorites, though I wouldn’t consider myself an “expert” anymore without getting back into some heavy research.

Here is an ancient tweet announcing the article:

The five banks I profiled have all gained since the article’s publication, though only one of them actually exceeded the returns of the S&P 500. Even with fairly substantial dividends – which usually drive a solid return if they are consistent and/or growing – couldn’t help the majority of these banks. On average, an investor would have been better served by investing in the S&P 500, with the compound annual growth rate (CAGR) and total growth of four of five banks trailing the S&P 500 from article publication (September 23, 2011) through January 12, 2018:

Stock Start Price End Price CAGR Total Growth Value of $10,000
Banco Santander $4.72 $7.17 6.85% 51.91% $15,191
BBVA $5.54 $9.10 8.18% 64.26% $16,426
Banco Latinamerico de Comercio Exterior $10.94 $29.81 17.22% 172.49% $27,249
Credit Suisse $18.04 $18.96 0.79% 5.10% $10,510
HSBC Holdings $5.55 $10.72 11.00% 93.15% $19,315
S&P 500 $1,136.43 $2,786.24 15.27% 145.17% $24,517

Source: Yahoo! Finance & author calculation; Stock prices include dividends & stock splits

Without doing a bit more research, I’d be hard pressed to explain away the performance of this group of banks, other than that they probably felt the effects of a lot of banking instability in Europe and elsewhere over the past few years. Banco Santander and BBVA are both based in Spain – which had a bit of a credit crisis not too long ago – and Switzerland’s Credit Suisse had some regulatory issues. Banks can be some of the best investments out there… until they aren’t, and it seems that these may have fell into that trap.

I know that I’ll talk about banks a little more over the next few months, so in a future post, I might outline some the best ways to find quality banks. In the meantime, however, I’d steer clear of these banks unless you are prepared to see slow growth and potential pitfalls, especially since the dividends mentioned in my past article just don’t exist as they once did (except for maybe Banco Latinoamericano de Comercio Exterior.

Until next time…

Disclaimer: I do not own currently own shares in any of the mentioned companies, and I have no plans to purchase shares of either company within the next 60 days in any account in which I manage investment funds. You can read a little about my personal investment philosophy here.

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