Investing in Bank Stocks: Opportunity Analysis in Global Markets

The Appeal of Banking in the Context of Rising Rates

The tightening of monetary policies has transformed the landscape of financial investment. With interest rates rising in response to persistent inflation, the profitability of the banking sector has experienced a notable expansion. It is estimated that the net interest margins of credit institutions have widened by approximately 30%, creating favorable conditions for those seeking the best banks to invest in.

Banks function as the circulatory engine of the global economic system. Their role is fundamental: channel resources, facilitate transactions, and generate the liquidity that every economy needs to prosper. An economy without access to bank credit simply cannot grow. For this reason, the performance of the banking sector is a reliable indicator of macroeconomic health.

Types of Banking Financial Institutions

Before selecting where to invest, it is essential to understand that the sector is organized into three main categories:

Commercial and Retail Banking

These entities collect deposits from the public and lend them as credits, generating income from the spread between the two rates. They operate under a fractional reserve system that allows them to work with reduced capital relative to their obligations. The viability of this model depends on healthy margins between what they pay for deposits and what they charge for loans.

Service fees constitute a second significant source of income. Credit cards, transfers, securities custody, and advisory services are examples that generate substantial cash flows.

Investment and Institutional Banking

Specialized in complex services for corporations, governments, and sophisticated investors. These include structuring financial transactions, securities placement, trading, and wealth management. A particularly profitable service is the underwriting of initial public offerings (IPO) for companies accessing the stock market for the first time.

Universal Institutions

Combine both operations: retail and investment banking. This generates income diversification but also greater operational complexity and accumulated risks from both segments.

Key Metrics to Evaluate Banks to Invest In

Rigorous selection of financial institutions requires analyzing three fundamental dimensions:

Value Creation Capacity

• Return on Equity (ROE): measures efficiency in utilizing shareholders’ capital
• Return on Assets (ROA): profitability generated per unit of assets
• Net Interest Income: volume of earnings from credit activity
• Net Profit Margin: percentage of each peso in sales that turns into profit

Credit Risk Profile

• Non-Performing Loan Ratio: credit portfolio that does not generate payments
• Loss Provisions: capital reserved to cover insolvencies
• Financial Leverage: ratio between debt and equity capital

Valuation Attractiveness

• Price/Tangible Book Value Ratio: cost of the share relative to tangible assets
• Price/Earnings Ratio: how much is paid for each unit of profit
• Relative valuation compared to sector peers

Overview of Best Banks to Invest In in North America

The US segment shows mixed performance. The S&P 500 Financials index registers just 0.25% return so far this year. However, within this apparent sluggishness, there are cases of superior performance:

Market Leaders

State Street, a custody institution specializing in institutional investment, leads with a return of 10.59%. Morgan Stanley follows with 9.46%, deriving 50% of its income from institutional securities services. Wells Fargo, a large universal bank with $1.9 trillion in assets, achieves 8.93%.

Citigroup records 7.02%, operating as a global conglomerate in over 100 jurisdictions. JPMorgan, the largest institution in the country with $4 trillion in assets, remains at 3.46%, below other peers.

Lagging

Goldman Sachs advances just 0.02%, lagging behind its sector index. Bank of America declines -0.76%. Charles Schwab, a leader in brokerage with $6.5 trillion under management, falls -8.55%, which is surprising given its market position.

European Banking: Markets with Greater Dynamism

The Eurostoxx 50 index advances 4.38%, but some banks outperform significantly. Spanish institutions lead the regional performance:

Banco Santander leads with 21.75%, focused on retail banking with a strong presence in Latin America. BBVA follows with 16.78%, generating three-quarters of its profits in emerging markets, especially Mexico.

Italian Intesa Sanpaolo achieves 13.21%, consolidating leadership in its domestic market. BNP Paribas, the largest French bank listed in Paris, adds 8.02%. ING Group from the Netherlands completes the analysis with 7.84%.

This region offers some of the best available banking assets, with double-digit returns in just two months of operations.

United Kingdom: Bifurcation of Opportunities

The FTSE 100 advances 2.53%. Intermediate Capital Group, a specialist in asset management within investment banking, records 16.60%. HSBC, one of the largest globals with $3 trillion in assets and 40 million clients, rises 12.19% with balanced operations between the UK and Hong Kong.

Lloyds Banking Group, a pure retail bank, adds 8.41%. Barclays, a universal bank with a presence on six continents, advances only 1.08%, below the index.

Fundamental Analysis: Profitability, Risk, and Valuation

Comparative Financial Performance

In North America, Charles Schwab shows an ROE of 18.13% with a net margin of 31.96%, followed by JPMorgan (13.69%; 27.90%) and Morgan Stanley (11.15%; 20.99%). However, Charles Schwab has a leverage of 20.51 times, higher than its competitors, which increases risk. Its valuation ratios are the highest, suggesting overvaluation at the end of 2022. JPM trades at $138.62 with a 2.5% increase since January, while MS trades at $96.06 with a 12.2% rise.

In Europe, BBVA and Santander are the only ones with double-digit ROE: 13.44% and 10.31%, respectively. BBVA leads in net margin with 21.66% and lower leverage (15.18 times). Both trade at significant discounts to book value: BBVA at €7.29 and Santander at €3.77, presenting buying opportunities.

In the UK, Intermediate Capital Group stands out with ROE of 29.56% and margin of 68.91%, although with low operating capital. Lloyds posts 10.02% ROE and 27.61% margin, trading depressed at £0.51. ICG, valued at £14.18, shows overvaluation.

Opportunities in the Current Cycle

The increase in interest rates directly benefits banking, expanding margins. Sector stocks distribute periodic dividends, allowing passive income generation or reinvestment with compound interest over the long term.

The strength of the banking balance sheet post-2008 has improved significantly. Prudential regulations like Basel III have increased capital requirements, reducing vulnerability to crises.

Risks to Consider

Cyclical Dependence

Banking contracts during economic slowdowns. Recessions deteriorate credit portfolios and demand for services.

Extreme Leverage

Small losses in assets can lead to systemic insolvency. The fractional reserve system amplifies this risk.

Agency Problems

Executives pursue their own incentives (bonuses, commissions) over shareholder interests, creating goal asymmetry.

Record Debt Levels

Governments, companies, and households reach historic debt highs. Sharp declines in activity can trigger default crises.

FinTech Competition

Payment platforms, peer-to-peer lending, robo-advisors, and mobile apps erode traditional margins through transaction cost reductions.

Cryptographic Threat

Digital currencies offer decentralized alternatives for payments and store of value, challenging the relevance of the traditional banking system.

Tax Pressure

Governments lean toward higher taxes on the sector, viewing profits as an easy fiscal target.

Outlook for 2023 and Beyond

Jerome Powell, Chairman of the Federal Reserve, reaffirmed in March that the disinflationary path will be “long and bumpy.” Economic indicators surpass expectations, suggesting terminal rates higher than anticipated. BlackRock anticipates hikes up to 6% and prolonged maintenance.

Given a resilient economy and persistent hawkish stance, the best opportunities in banking stocks persist during this period. Selected Spanish and British institutions show attractive valuations. Larger North American banks offer stability but at higher prices.

The banking sector maintains its central role in every modern economy. Investing in the highest quality actors with relative valuation remains a solid strategy for 2023.