There has been positive news for Barclays (LSE: BARC) recently as it has seen off a challenge from activist investor Edward Bramson, who is a major shareholder and was looking to gain a seat on the board. Having fended off Bramson, CEO Jes Staley can now look at working to improve the investment banking operations (an area Bramson was keen to see scaled back) and the board can now put greater concentration into improving shareholder returns. So far so good, but…
It’s not all sunshine
Despite now having more breathing space, I don’t think the Barclays board should be popping the champagne corks just yet. Investors will be expecting progress to be made in boosting the group’s overall profitability and getting the investment bank into a position where it can be better compete with the US giants that dominate its area.
Looking just at the share price, investors have reason to be upset thus far. Barclays is a serial under-performer with a share price only a little higher than it was as long ago as 1995. Over a 10-, five-, and one-year period, the share price has always been lower, showing there is a lot of work to be done. And despite the falls, the share price is not yet low enough to tempt me.Â
The direction of travel doesn’t look great either, because in the first quarter profit dropped by 10%. Maybe patience will reward investors, but from my point of view, those looking to invest in a bank have many better options than Barclays.
A competitor in much better shape
One of the best alternatives I think is Asia-focused HSBC (LSE: HSBA). The share price has far better momentum, being comfortably up over five years and having risen strongly in the year to date (it has increased by around 5.3%).
Its results also show a business that is in far better shape than its peer with pre-tax profit for the three months to the end of March increasing by 31% to $6.2bn as costs were slashed. The firm is also seemingly having to spend less to compensate for past misdemeanours, something investors will be very thankful for.
Shift to the East
I think HSBC’s greater exposure to the fast growth of emerging markets in Asia means it has far greater profits potential than Barclays too. And HSBC’s strategy is to keep growing its Asian business, which I feel is sensible seeing as it has scale there and opportunities for growth as more of the population in those countries use bank services. But it is not all about emerging markets. The group also has an opportunity to create more value from improving its struggling US business and from increasing its share of the banking market in its more mature markets such as the UK.
The share valuation is not at all expensive, with the P/E coming in just below 15, while investors also get rewarded with an attractive dividend yield of around 5.7%.
Looking at these two banks I’d say that Barclays has a long way to go before it can reward shareholders enough to be tempting, whereas HSBC is already providing superior returns and its reasonable P/E ratio means investors haven’t missed the growth boat either. I think the shares offer a potentially very profitable combination of growth opportunities ahead and income now.