2015 has been a very disappointing year thus far for HSBC Holdings (LSE: HSBA) and Royal Bank of Scotland (LSE: RBS). Their share prices have fallen by 12% and 15% respectively and, looking ahead, many investors may be struggling to find potential catalysts to boost their valuations.
In the case of HSBC, it is suffering from inefficiencies. It has the highest operating costs in its history and, while many of its banking peers have been forced to reorganise, cut staff costs and sell underperforming units after savage losses during the credit crunch, HSBC’s continued profitability has arguably caused it to get a little comfortable. Now, though, it is seeking to make 25,000 staff redundant and cut its overall costs by $5bn as it seeks to improve margins given the potential top-line challenges which may await in the near-term in Asia.
Similarly, RBS is not yet operating at full potential. While it has made great leaps towards full financial health following its disastrous period during the credit crunch, the bank has still not been able to generate a significant return on equity. For example, last year it stood at just 1.2% and, with the bank not yet deemed healthy enough to pay a reasonable level of dividend, it remains in the midst of a turnaround plan.
Due to their challenges, both stocks now trade on very appealing valuations. For example, HSBC commands a price to earnings (P/E) ratio of just 10.2, while RBS also has a rather low rating of 12. Both of these figures indicate significant upside if the two banks can push their profitability higher and, with HSBC’s bottom line due to rise by 2% next year versus a fall in RBS’s net profit of 11%, it appears to be in the stronger position in the short term.
Furthermore, HSBC is a much more impressive yield play. It currently yields a whopping 6.2%, while even with brisk dividend per share increases in the next couple of years, RBS is still expected to have a yield of 0.5% next year. This doesn’t mean that, in time, RBS will fail to become a strong dividend play. It does, however, mean that in the next few years at least it will severely lag HSBC in the income stakes.
In addition, the sale of RBS from government to institutions/public could create a degree of uncertainty. For Lloyds this was initially positive, as it showed that the bank was in a relatively healthy state, but since an initial ramp-up in share price its performance has been rather lacklustre. So, while RBS could gain a boost from the sale of the government’s stake, it could also put a brake on future upward reratings.
As such, and while both stocks are excellent long term buys, HSBC seems to be much closer to the finished article. With cost savings on the way, the potential to muscle in on a still fast-growing Asian economy, low valuation and high yield, it seems to be a better long term buy than RBS right now for investors who can only buy one or the other.