Why Smart Money Is Looking Overseas for Bank Stocks

Key Points

• The S&P 500 returned 2.6% over the last three months, yet another quarter where many international markets like Spain, Canada, and South Korea posted better gains.
• If the international outperformance trend continues into 2026, many of the winners could be in the banking sector, which is severely undervalued.
• These two international banks are well-positioned to benefit from these economic trends.

What were the best-performing sectors and industries in 2025? For most investors, some version of tech need for AI is the answer, whether it's semiconductors, memory storage, or software. It could be a commodities-based industry, such as gold or silver. A mention of international bank stocks might raise eyebrows, but this sector deserves to be mentioned in the same breath as the rest of 2025’s winners.

Global banks, especially European ones, enjoyed tremendous outperformance last year, thanks to several tailwinds from both home and abroad. Can these tailwinds continue in 2026? Two international bank stocks appear well-positioned to deliver additional upside as favorable trends remain in place.

International Stocks Continue to Outperform U.S. Peers

Despite a resurgent artificial intelligence trade in the U.S., the fourth quarter of 2025 was another win for its international peers. The SDPR S&P 500 ETF NYSEARCA: SPY has gained 2.61% over the last three months, but that gain was more than doubled by ETFs representing equities in Italy, Canada, Spain, and South Korea.

South Korean equities are on a particular tear, surging nearly 27% since the start of October. The tech sector has done much of the lifting in the U.S. markets over the last few years, while international markets have become more diverse and less expensive.

The outperformance of international equities continues to be led by many of the same influences. The US dollar is no longer free-falling versus other currencies, but it remains weak against majors like the Euro and British pound. Currency pressure is also highlighting the valuation disparity between U.S. and international equities. While the price-to-earnings (P/E) of the S&P 500 continues to drift toward 30, European and Canadian indices are sitting at more modest P/Es between 17 and 20. The banking sector in these countries is particularly undervalued, with P/Es often between 10 and 12.

International banks also tend to be more friendly with dividends than their U.S. counterparts. Public U.S. banks often prefer buybacks to dividends when returning value to shareholders, which can be more tax-friendly, but also doesn’t help an investor seeking steady income from their portfolio. International banks frequently yield higher dividends than those of typical large-cap domestic banks.

Few Sectors Have Been Hotter Than International Banking: These 2 Stocks Lead the Pack

The banking sector of the European Stoxx 600 index has actually outperformed the U.S. tech sector since 2021, yet valuations remain suppressed.

If you’re looking to diversify your portfolio away from tech-heavy U.S. stock indices, consider one of these international bank stocks that offer value and outperformance potential.

Deutsche Bank: No Longer the Sick Bank of Europe

For many years, investors avoided shares of Deutsche Bank AG NYSE: DB like the Dallas Cowboys avoid playoff victories.

If there were a scandal in European banking, it was a good bet Deutsche would have a hand in it, and fines and restructuring costs kept the stock in a steady decline following the 2008 financial crisis.

DB shares are still far off their 2007 all-time high, but the stock is up 500% since July 2022 thanks to a series of cost-cutting measures designed to exit underperforming businesses and return to core strength areas (and profitability).

Probability has been delivered to DB shareholders: three straight quarters of positive EPS figures and three massive revenue beats. Despite strong earnings, the stock trades at just 13 x forward earnings and 0.87 times book value.

Deutsche Bank no longer needs to be handled with gloves, and the chart shows a bullish trend with plenty of momentum behind it. The 50-day simple moving average (SMA) was a great entry point for investors in 2025, and it appears to be holding strong into the new year.

HSBC Holdings: Bridging Europe and Asia

HSBC Holdings plc NYSE: HSBC is in a unique position as a large-cap bank with significant ties to both Europe and Asia. 

The company is doubling down on Asia, having recently acquired and privatized Hang Seng Bank to leverage its footprint in Hong Kong.

HSBC’s wealth management operations in Asia are also scaling quickly, giving the bank ample sources of both fee revenue and interest income.

HSBC is a responsible capital steward, paying a 2.46% dividend yield with a 41% payout ratio. It also rewarded shareholders with a special dividend and share buybacks, using the cash from selling its Canadian banking units. 

A strong dividend and a growing global client base offer opportunities for income and stock price appreciation, and analysts spent much of Q4 2025 upgrading HSBC. Zacks Research, Erste Group Bank, Bank of America, and Keefe, Bruyette and Woods all upgraded the stock to Buy or Strong Buy before the end of the year. 

HSBC shares have soared nearly 20% in the last three months, so investors must watch the MACD for signs of a pullback. The 50-day SMA is once again an ideal entry point should momentum wane from here.