I’ve long taken a positive spin on the health of much the British banking sector, and have been particularly cheery over the investment prospects of Lloyds (LSE: LLOY) and HSBC (LSE: HSBA). But last month’s referendum result has made me revisit my view on the segment, particularly on those banks generating the lion’s share of their profits from the UK.
Just this week BlackRock head Larry Fink echoed concerns of business leaders, politicians and economists over the domestic economy by warning on CNBC that “we’re pretty convinced Brexit is going to cause a short-term recession.”
Discussions concerning how and when Britain will withdraw from the European Union threaten to be a drawn-out affair, a situation that could smash revenues growth at Lloyds as the company is dependent on a healthy retail banking segment.
On top of this, the prospect of ultra-low interest rates to reinvigorate the economy adds another layer of pressure to Britain’s banks. Sure, the Bank of England may have kept interest rates on hold at this week’s meeting. But Mark Carney and his crew are expected to pull rates lower in August.
Export excellence
These concerns have seen Lloyds’ share price descend 22% since the referendum. However, HSBC has actually risen following a temporary dip, ‘The World’s Local Bank’ having added 5% in value since the vote.
Investors are flocking to Footsie stars with vast international exposure, and HSBC certainly fits this bill. It sources around 25% of income from the UK, and while this is still a weighty figure, the bank’s focus on hot emerging regions makes it an attractive destination in the present climate.
Of course fears over a cooling Chinese economy are likely to continue. But data released overnight showed economic growth in HSBC’s core region of China remained stable at 6.7% during April-June, a figure that also put Britain’s weak GDP forecasts in the shade.
Dividend dilemma
I believe HSBC’s terrific presence in the Asian growth region, allied with its strong exposure to the robust US marketplace, makes the bank a better pick than Lloyds, in the near term and beyond.
Lloyds’ previous advantage came in the form of its superior capital pile — the firm’s CET1 ratio stood at 13% as of March versus 11.9% over at HSBC — and subsequently sunnier dividend outlook.
Indeed, many had even been tipping HSBC to cut the dividend in 2016 due to temporary revenues pressures and falling benefits from its cost-cutting scheme.
However, the Bank of England’s decision to ease capital restrictions came with the advice “that firms do not increase dividends and other distributions as a result of this action.” While non-binding, this could see part-nationalised Lloyds struggle to raise last year’s dividend of 2.25p per share.
This figure still yields a chunky 4%, a tasty reward should the bank freeze the payment in 2016 instead. But given Lloyds’ poor revenues outlook, I reckon both growth and income seekers should shop elsewhere.