Finally, some good news from the banking sector. Barclays, Lloyds Banking Group and Royal Bank of Scotland have all published disappointing updates lately but HSBC Holdings (LSE: HSBA) has now given investors something to celebrate by smashing first-quarter expectations.
Profit jump
HSBC is up almost 2.5% at time of writing after reporting a 31% jump in profit after tax to $4.9bn, driven by a combination of rising revenues and falling costs.
Group CEO John Flint hailed “an encouraging set of results, particularly in the context of heightened economic uncertainty globally”, as reported revenue grew 5.2% to $14.2bn year-on-year. Adjusted revenue rose 9%, supported by positive market impacts and disposal gains, while reported operating expenses fell 12% to $8.2bn.
Tier one
Other positives included a 40% jump in earnings per share (EPS) to 21 cents, while return on tangible equity rose 220 basis points to 10.6%. HSBC’s common equity tier 1 ratio also climbed, rising 30bps to 14.3% in the last three months.
Its retail banking and wealth management division led the charge, posting a 10% rise in revenue to $6bn and commercial banking revenues rose 11% to $3.9bn. However, its global markets business disappointed, with revenues falling 5% to $1.7bn.
Asian age
China has massive exposure to Asia so it is good news that this region enjoyed “strong growth”, with reported revenue up 7% and Hong Kong particularly lively. HSBC still has to turn its US operations around though.
Like its high street rivals, HSBC is being punished by the “softer rate environment”, with net interest margins dipping from 1.67% to 1.59%, a trend seen at other banks.
Still, it looks a lot brighter than Barclays, which last week published a 2% drop in income while EPS dipped 11.2%. This table courtesy of Hargreaves Lansdown shows that HSBC is the only one of the big four whose share price is up over five years, with Barclays, Lloyds and RBS still heavily down.
|
Bank |
Forward yield |
Forward P/E |
Year-to-date |
5 year growth |
|
Barclays |
4.74% |
7.20 |
9.31% |
-36.35% |
|
HSBC |
5.97% |
11.95 |
3.22% |
10.24% |
|
Lloyds |
5.61% |
7.99 |
21.12% |
-19.93% |
|
RBS |
6.12% |
8.30 |
12.17% |
-26.72% |
As you can see, momentum is with Lloyds, up 21% year-to-date. This has been my favourite banking sector play for some time so I’m glad to see it going on a tear, and it is still cheap, trading at 7.99 times earnings. HSBC is the most expensive, trading at 11.95 times earnings, a tribute to its relatively strong growth (up 50% measured over three years).
Too big to ignore
All four have valuations well below today’s FTSE 100 average P/E of 16.82 times earnings, a reminder that investors remain wary about this sector. While the era of big regulatory penalties seems to be over, they now have to contend with concerns over the slowing global economy and the impact on impairments in particular. Interest rates look set to stay lower for longer, hitting margins as well.
If you are investing for the long-term, I don’t see how you can ignore the banks. I feel particularly emboldened when I look at those forward yields, which are all around the 5% or 6% mark, while HSBC’s payout is forecast to top 6.3% next year. EPS growth projections are promising too, at 12% in 2019 and 4% in 2020. HSBC is one to buy, then simply forget about.