Is the time come to show confidence in major British banks?
Banking is a cyclical industry. The COVID-19 pandemic is expected to result in a large number of bad loans, and banks have had to set aside significant amounts for this. Low interest rates are also damaging profits. The lower the interest rate, the less a bank earns on its loans, while the profit margins on the loans provided are under pressure.
Year-to-date, the FTSE 100 is still down more than 20%. Still, the banking sector has fallen even more dramatically. HSBC Holdings (LON :), (NYSE 🙂 is the largest of the five market value banking groups included in the UK's leading stock index. The others are Lloyds Banking Group (LON :), (NYSE :), Barclays (LON :), (NYSE :), NatWest Group (LON :), (NYSE :), and Standard Chartered (LON :), (OTC 🙂
This is how these five banks have fared so far in 2020:
HSBA: down 47%
LLOY: 46% lower
BARC: 41% lower
NWG: 54% lower
STAN: Down 29%
This downturn shows that investor sentiment in bank stocks remains vulnerable. In fact, the industry has been one of the most volatile and worst performing in the UK for nearly two decades. Yet until earlier this year, many investors included banks in their portfolios due to their relatively high dividends.
But on March 31, the Bank of England's Prudential Regulation Authority (PRA) asked all UK-based banks to suspend their plans to return money to shareholders. They will therefore not pay dividends or buy back shares for the time being.
Here's a closer look at HSBC Holdings to see if it deserves your attention this fall.
HSBC is a global bank
The group is one of the world's largest financial organizations. Although HSBC is headquartered in London, approximately three-quarters of its profits come from corporate clients in Asia. It also has significant operations in the UK, as well as in the European Union.
A bank's fortunes are closely linked to the economic health of its major markets. In the case of HSBC, that would be China, including Hong Kong. Investment decisions should be based in part on developments in this important region.
HSBC's deep roots in Hong Kong date back to the 1860s. Therefore, any criticism of Hon Kong-based news will affect investor sentiment in equities. For example, in recent weeks it has publicly supported the national security law imposed by China in Hong Kong. That position has sparked a great deal of debate as many wonder whether the board should ultimately choose between doing business in the West and operations in Asia.
In addition, in recent years, the Global Bank has become entangled in tense US-China relations, which are likely to remain unstable, especially during the final stretch of the US presidential election.
In early August, HSBC was released for the six months ending June 30. The numbers raised eyebrows as pre-tax profit fell 65% to $ 4.3 billion (about £ 3.2 billion). The number was much steeper than analyst forecasts. Bad loans related to the pandemic could be as high as $ 13 billion (£ 9.7 billion).
Profits in the US and Europe were negatively impacted, while performance in Asia remained more resilient. Management will also accelerate plans to cut 35,000 jobs from its 235,000 employees. The bank is in the midst of a major restructuring of its global banking operations. For example, it will close a third of its more than 200 locations in the United States. Finally, HSBC offered a moderate outlook for the remainder of the fiscal year.
At this point, we did not rush to buy HSBA stock. However, we would reevaluate fundamentals if the price moves towards, or even below 300p, a level last seen in 1995 (in US listed stocks we would find more value below $ 20). The current forward P / E and P / B ratios are 18.48 and 0.48, respectively. A further decline in the stock price of about 7% -10% would improve the margin of safety.
Bottom Line
Banks have been out of favor in the UK for many years, but especially in 2020. But if we were to invest in a UK-based bank stock now, we would go for Barclays, whose investment banking arm is currently strong. Despite the current headwinds in the sector, trade profits at the investment bank have risen in recent months.
The results are similar to those released by Goldman Sachs (NYSE :), which recently had the second highest ever sales. GS stocks performed better under US banks. In the coming weeks, we'll take a closer look at Barclays and other global names in the industry.
