The unthinkable could be about to happen — we really could see the UK leaving the European Union in a no-deal Brexit disaster.
The Prime Minister might have got her proposed deal endorsed by what’s left of her cabinet and by the EU bigwigs, but selling it to the House of Commons is going to be a very tough task.
Bank of England governor Mark Carney is saying the UK economy just isn’t ready for a no-deal scenario, and estimates suggest such an event would lead to a 9.3% economic fall over the next 15 years.
Now, I don’t think the hit on the UK’s banks will be as hard as many fear — it will be tough, but I see too much downside already built in to share prices. But if you are looking for maximum post-Brexit safety, I see HSBC holdings (LSE: HSBA) as offering that.
Big yields
Andy Ross rates HSBC’s dividend highly with its forecast yields of around 6%, and that’s a fair bit ahead of yields from Barclays and up with expectations for Lloyds Banking Group — but without the UK banking sector exposure. HSBC’s specific focus on China and its sphere of influence, and on Asia in general, really should isolate it from any British or European economic woes in the event of a bad Brexit.
That isn’t without its own risk, mind, and any further escalation of US-China trade wars could have an adverse impact. But I do think the chance of that heating up further is receding and cooler heads are starting to prevail. It’s almost as if President Trump has a short attention span and has found some different foreigners to shout at now.
But how prepared is HSBC, really, to survive another economic or financial crisis? The latest Bank of England stress test results were released Wednesday afternoon, and HSBC came out looking pretty good.
Tough test
The tests imagined a scenario in which a global economic downturn resulted in particularly adverse effects on China, Hong Kong and other emerging markets. In addition, the super-bearish model also envisaged the UK bank rate climbing as high as 4% and a big fall in the value of Sterling.
Even in that scenario, HSBC’s CET1 ratio on an IFRS 9 transitional basis would fall to 9.1%, which is comfortably above the bank’s hurdle rate of 7.8%. And on a tougher IFRS 9 non-transitional basis, we’d see the bank’s CET1 falling to 8.2%, which again is safely ahead of its 6.6% hurdle rate.
The bank itself said that the results “demonstrate HSBC’s continued capital strength under this severe scenario.”
Up with the best
As a comparison, Lloyds came out with a 9.3% CET1 ratio on a transitional basis, with Barclays bringing in a CET1 of 8.9%. As an aside, that’s another reason for me to like Lloyds as an investment. But the key outcome is that HSBC looks to be in a strong liquidity position — and I really can’t see even the worst of Brexit coupled with a China-centred slowdown producing anything close to these stress test conditions.
HSBC shares are valued more highly than the other banks, on a forward P/E of a bit over 11 (Lloyds is on seven), and I think that reflects the lack of European/Brexit exposure. I see HSBC shares as offering solid income value.