HSBC Holdings (LSE: HSBA) (NYSE: HBSC.US), Standard Chartered (LSE: STAN) and Barclays (LSE: BARC) (NYSE: BCS.US) have all lagged the FTSE 100 over the last year, leaving all three looking very cheap by most measures.
| Company | 1 year share price movement |
|---|---|
| FTSE 100 | +4.3% |
| Standard Chartered | -12.5% |
| HSBC Holdings | -13.2% |
| Barclays | -23.3% |
In this article, I’ve rated HSBC, Standard Chartered and Barclays on five key measures, to see which scores highest, and tops my list of recommended banking buys.
1. P/E ratio
Here’s how the three banks compare in terms of their 2014 forecast P/E ratios:
| Â | Barclays | HSBC Holdings |
Standard Chartered |
|---|---|---|---|
| 2014 forecast P/E | 9.8 | 11.4 | 11.0 |
Barclays is a clear winner here, thanks to its single-digit forecast P/E ratio of 9.8. The UK bank is going cheap because investors are not yet fully-confident that its turnaround plan will succeed.
2. Price-to-book ratio
Buying assets for less than their underlying assets are worth helps to minimise the chance of losses from an investment, assuming the reported asset values are correct, and are not impaired.
| Â | Barclays | HSBC Holdings |
Standard Chartered |
|---|---|---|---|
| Price-to-book value | 0.75 | 1.05 | 1.20 |
Barclays wins again, as its shares trade at a significant discount to book value — a key appeal for value investors.
3. Dividend yield
Banking shares have lost some of their dividend appeal since the financial crisis, but both Asia banks still look attractive, and Barclays’ payout is expected to rise fast over the next couple of years.
| Â | Barclays | HSBC Holdings |
Standard Chartered |
|---|---|---|---|
| 2014 prospective yield | 3.4% | 5.1% | 3.9% |
The FTSE 100’s largest bank, HSBC, is a clear winner here, with a prospective yield in excess of 5% which should see the per share payout finally rise above 2008 levels.
4. Return on equity
A key measure of profitability for banks is their return on equity (RoE) — effectively the profit generated as a percentage of the bank’s equity, or net asset value.
| Â | Barclays | HSBC Holdings |
Standard Chartered |
|---|---|---|---|
| Return on Equity (2013, adjusted) | 4.5% | 9.2% | 11.2% |
Standard Chartered wins in this category, as it has done continuously since 2008. I expect both Barclays and HSBC to do better in 2014, but there are no guarantees.
5. Capital strength
From 2015, banks’ financial strength will be measured using the Common Equity Tier 1 Ratio (CET1). A CET1 ratio of at least 7% will be required, but anything less than 10% is already considered to be a potential weakness:
| Â | Barclays | HSBC Holdings |
Standard Chartered |
|---|---|---|---|
| Common Equity Tier 1 Ratio (2013) | 9.3% | 10.9% | 11.2% |
Again, the winner is Standard Chartered, albeit only by a narrow margin. Barclays is the laggard here, and its sub-10% CET1 ratio is probably one reason why its shares trade at a discount to book value.
The overall winner is…
It’s a draw! Barclays and Standard Chartered won two categories apiece, and in my view both offer decent upside potential: Barclays’ share price should eventually be re-rated to reflect its book value, while I believe the market is underestimating the medium-term growth potential in Standard Chartered’s key Asian markets.