Maybe recent stock market volatility has exposed some bargains in the banking sector. Today I’m looking at HSBC Holdings (LSE: HSBA), Standard Chartered (LSE: STAN) and Secure Trust Bank (LSE: STB).
Structural change
Results for the first half-year were not bad at HSBC Holdings. The recent interim report showed pre-tax profits up 10% on the year-ago figure.
However, the firm’s chairman points out that the environment for banking is challenging. Economic conditions are uncertain in many parts of the world, particularly in the Euro zone and in China, he says. The company is working hard to embed structural change resulting from regulatory pressures. Meanwhile, advancing technology presents both opportunities and threats. New firms into the banking industry are using technology to disrupt established business models in the sector, and HSBC is finding opportunities through technology to improve efficiency and build better customer products and services.
There’s a lot on HSBC’s plate, but the directors see opportunity for growth too. For example, there is what the firm describes as
“observable mega-trends supportive of financial system growth, growing urbanisation across Asia, infrastructure development in both emerging and developed markets, investment in new technology to address environmental efficiency and the development of capital market solutions to add fresh financing capabilities and contribute to the financial needs of an ageing population“.
All these things, the chairman reckons, have “positive implications for the role and profitability of the financial system“, along with what seems like the determination of central banks to “maintain a policy environment aimed at the resumption of sustainable economic growth“.
HSBC’s shares are down in the market turmoil, but they have underperformed for years. So, despite tempting-looking valuation metrics, I wonder if it might be better to ride the firm’s growth vision with investments in other companies in other sectors rather than by buying HSBC shares.
A turnaround ‘opportunity’
Over at Standard Chartered, the shares have bombed by around 66% since late 2010. Hang on, that shouldn’t happen in a macro-economic cylical up-leg! If bank shares haven’t done well over the last few years since the credit-crunch, when will they?
In the recent interim results report the firm’s chairman said Standard Chartered made progress on strengthening the company’s capital ratio in the period. However, the actions taken affected return on equity, and combined with a disappointing earnings performance. The firm does most of its business in Asia, Africa and the Middle East and the near-term outlook is weak, so the directors cut the dividend by 50%.
That’s grim. No wonder the share price plummeted. The Chief Executive reckons the results show the firm experienced challenges, but they are fixable. So, Standard Chartered is something of a turnaround proposition as it stands. That’s why I’ll take my investing chances elsewhere. Iconic investor Warren Buffett once said, “Turnarounds seldom turn,” and I have no reason to argue with him.
A fast grower
Fast-growing Secure Trust Bank is one of those new banking upstarts biting the ankles of the old dinosaurs such as HSBC Holdings. The recent interims revealed uplift in pre-tax profit of 40%. The firm’s latest charge for growth is by lending to small and medium-sized enterprises (SMEs).
The chairman reckons the bank is well funded and diversification into SME activities is proving successful, with lending to UK businesses growing and now exceeding £25m per month. He says the improving macroeconomic environment and the election of a business-friendly government provides confidence for continued growth in the second half of the year.
UK-focused Secure Trust Bank is much smaller than HSBC Holdings and Standard Chartered, with a £521 million market capitalisation. However, the firm’s business seems to be firing on all cylinders and its operations appear refreshingly unencumbered by the legacy issues plaguing the bigger outfits. Secure Trust is the clear growth option of the three firms featured and, as such, I find the firm attractive.
