To say that global banking giant HSBC (LSE: HSBA) (NYSE: HSBC.US) has suffered a nightmarish fortnight would be something of a colossal understatement. Already stalked by global regulators over misconduct at its Swiss banking arm, the institution announced today that pre-tax profits slumped 17% in 2014, to $18.7bn, driven mainly by huge misconduct charges for the mis-selling of PPI and forex market rigging.
Sector rival Standard Chartered (LSE: STAN) has also seen market appetite steadily wane as it also faces increased scrutiny from investigators in the US, this time over allegations that previous trade sanction breaches may be worse than first thought.
Earnings expected to rebound from 2015
Still, many investors would argue that recent share price weakness offers plenty of upside for value hunters. Following last year’s hefty 18% earnings slide, City analysts expect HSBC to get back on the war path from this year onwards, and advances of 32% and 7% — to 91.6 US cents and 98.1 cents per share — are currently chalked in for 2015 and 2016 respectively.
These projections leave the company changing hands on a P/E rating of 10.4 times predicted earnings for this year, and which ducks to just 9.5 times for 2016. A reading around or below 10 times is widely considered terrific bang for one’s buck.
Like HSBC, StanChart is also expected to report a poor 2014, and a 5% decline is currently predicted by brokers. But a return to growth is also anticipated almost immediately, with advances of 3% this year and 12% for 2016 currently expected, leaving the bank dealing on earnings multiples of just 9 times and 8.1 times for these years.
Darling dividend picks… At least on paper
And arguably the biggest pull for both banks is the delicious dividend yields on the table. HSBC is expected to lift the dividend of 50 cents per share last year to 54.9 cents in 2015 and 59.6 cents in 2016, producing eye-watering yields of 5.9% and 6.4% correspondingly.
Although dividend coverage for these years, at 1.7 times, falls below the safety watermark of 2 times, I believe that investors can take confidence that the firm’s robust capital pile — the firm’s CET1 ratio edged to 10.9% last year — and strong earnings forecasts should underpin these payments.
Standard Chartered also offers terrific yields through to the end of next year, and the bank carries readouts of 5.3% and 5.4% for these years.
But the number crunchers also reveal the precarious state of the firm’s balance sheet, with a decline to 81.2 cents for last year, from 86 cents in 2013, to be followed with another slip to 78.9 cents in 2015. A tentative rise to 81.5 cents is anticipated for 2016, although rumours of a rights issue could put these numbers in jeopardy.
Despite the possibility of further heavy penalties owing to its misdeeds in Switzerland, I believe that HSBC’s strong global presence makes it a terrific option for those seeking long term earnings and dividend expansion, particularly once cyclical weakness in emerging markets dissipates. Indeed, revenues of $62bn last year, although flat on-year, was a solid performance given market difficulties at the start of the year.
However, I reckon that StanChart still has a number of obstacles to overcome before it can be considered. From questions over the future of the board; the state of its balance sheet; the bank’s huge exposure to weak commodity markets; and enduring problems in Asia, I believe that current forecasts could come under renewed pressure following a tumultuous 2014.
