Foreign Banks: The Underrated Rate Hike Play of 2016

Banks will be one of the big winners in 2016 thanks to higher interest rates.
However, while most investors are focusing on the big U.S. banks, there could be better plays abroad. That’s right, foreign banks could do much better than large U.S. banks like Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM).
A big part of this reasoning is that foreign banks hold more reserves with the U.S. Federal Reserve. Consider this: Foreign banks hold 50% of the Fed reserves. The reason for this is that foreign banks don’t have to pay Federal Deposit Insurance Corporation (FDIC) fees. So they can borrow overnight from the Fed and collect a higher spread on money kept in reserves, whereas U.S. banks collect a much smaller spread.
Of all the interest that the Fed paid out this year, half went to foreign banks. These payments will double next year thanks to the rate hike earlier this month. As rates go even higher, that’s more money the Fed will be paying out.
Here are two foreign banks that not only will benefit from the recent Fed rate hike but also pay hefty dividends and have impressive growth opportunities:

Credit Suisse (NYSE: CS)

Swiss banking giant Credit Suisse could be one of the big winners of higher rates. It has about $40 billion in reserves at the Fed.
Credit Suisse is one of Europe’s strongest banks and came out of the credit crisis stronger. It’s trading at 10.5 times earnings and is one of the cheapest foreign banks around. It also offers a 3.4% dividend yield.
The key advantage for Credit Suisse is its private banking focus, which should be its real bread-and-butter business in 2016. Within that business, customer retention is much higher and margins benefit from higher pricing ability and low required capital.
It’s also making moves to expand into Asia – which has higher growth than other areas – and it has a commitment to cut costs and grow the investment banking business.
Credit Suisse had another competitive advantage. The bank plans to continue cross-selling customers private banking and investment banking services, while other competitors are choosing to just focus on one or the other.
There’s plenty of room for Credit Suisse to improve its investment banking business as well. All of its investment banking products rank lower than competitors and costs run higher.

UBS Group (NYSE: UBS)

Fellow Swiss banker UBS is another foreign bank worth taking a look at. It’s paying out an impressive 4.1% dividend yield. It’s also one of the best performing foreign banks around, with shares up 15% year-to-date.
Again, UBS’s private banking sets it apart from other banks. It has one of the world’s largest private banks. It’s also exiting the investment banking business to focus on the steadier private banking business. This is part of UBS’s quest to become leaner – an initiative that has included cutting jobs and closing down unproductive trading desks globally.
After getting hit with losses and scandals due to the 2008 financial crisis, UBS – under new leadership – has been focusing on honing in on where it can add value, as opposed to rapid growth. This includes not just the private banking side, but also the Swiss retail and asset management businesses.
While most investors are looking at conventional banks as plays on higher rates, foreign banks could be even better bets with higher dividend yields. Plus, they are already tapping into faster growing areas of the world and have a commitment toward focusing on niche areas where they have the opportunity to excel.