More to Come From Banking Stocks

More to Come From Banking Stocks

Japan – the Other Side of the Coin

Hamstrung by persistently low interest rates, an aging and declining population at home and stricter capital rules globally, Japanese banks have been looking overseas for growth opportunities.

Mitsubishi UFJ Financial Group is in the process of buying a stake in Bank Danamon in Indonesia, in the hope of plugging into the aspirational middle class in Southeast Asia's largest economy with population of over 250 million.

Slight Turbulence in Australia

Meanwhile Australia’s big four banks could also be in for a turbulent year after the government announced a royal commission into misconduct into the country's banking and financial services sector.

Following a series of high profile misdemeanors ANZ, Commonwealth Bank of Australia, National Australia Bank, and Westpac came under growing political pressure. The banks believe the enquiry will lead to costly and unnecessary distractions and could hit their shares.

Potential in Europe

Back in Europe, banking shares still have substantial potential compared with their U.S. rivals, because they were later in adjusting their business to the new rules about capital requirements.

They also emerge from a period when new European rules – Mifid II – are done and dealt with, the automatic exchange of information has come into force and several scandals including tax avoidance and rigging have finally been settled.

Costs Under Control

This will help financial firms keep costs under control. Similarly, there’s improvement in the earnings outlook, with a moderate increase in interest rates set to boost interest income.

Add to that a broadly based economic recovery that will lead to economic growth across all 45 member states of the OECD as well as higher growth rates in 33 of the countries than last year – a rare occurrence.

The positive growth outlook is will be of particular help for international players, because they are more likely to turn good market performance into profits than the domestic champions.

Credit Suisse or UBS?

Credit Suisse has a leg up on UBS in investment banking, as illustrated by the league tables published by «Thomson Reuters». And the smaller bank still has a lower valuation than UBS.

Pure players such as Julius Baer stand also to profit from the development. The share of the private bank recovered quickly from the dip following the departure of its charismatic CEO Boris Collardi in November, and recently hit a record 64 Swiss francs.

European Opportunities

Vontobel and EFG International are two other banks likely to benefit from more favorable economic prospects. EFG has been able to restore its image – the surge of its stock is evidence enough. It gained 75 percent from a year ago, the biggest increase among Swiss listed banks.

Outside Switzerland, there are banking stocks with potential across Europe, helped by an ongoing consolidation among institutes. One of the banks to watch is Commerzbank, a takeover candidate. Some say that UBS is tempted: the rumors have helped the German bank to double in value within 12 months.

By contrast, Deutsche Bank shareholders are less blessed; their bank failed to provide any added value over the past months. The share price is lower than a year ago – but perhaps this is the right moment to invest?