Are big banks like HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) still the best way for private investors to get exposure to the financial sector?
I’m not sure: the last few years have seen big banks globally struggling to generate decent returns, and labouring under multi-billion fines for misconduct. Just yesterday, Deutsche Bank was fined a record $2.5bn for rigging Libor interest rates.
HSBC hasn’t been without sin either, and the world’s local bank reported a total of $3.6bn in fines, settlements and compensation payments in 2014. This is money that could otherwise have been used to increase shareholder returns and boost profit growth.
Although HSBC’s 5.7% prospective yield is pretty safe and the bank’s valuation is undemanding, there is definitely a risk that this supertanker-sized bank will struggle to deliver much in the way of growth.
Two possible alternatives
Banks are meant to be safe and substantial investments — so if you’re looking for alternatives, they need to be reasonably well-established businesses.
Two possibilities I’ve considered are interdealer broker Tullett Prebon (LSE: TLPR) and spread betting provider IG Group Holdings (LSE: IGG), which despite its modern image has actually been in business since 1974.
Here’s how Tullett and IG compare to HSBC on key income, value and growth metrics:
|
HSBC |
Tullett Prebon |
IG Group |
|
|
Forecast P/E |
11.4 |
11.2 |
16.9 |
|
5-year average earnings per share growth |
1.2% |
-9.6% |
6.7% |
|
Prospective yield |
5.7% |
4.6% |
4.0% |
On the face of it, HSBC and IG are the best choices, depending on whether your focus is on growth or income.
However, IG’s earnings are expected to fall by 10% this year, as a result of a long period of low volatility in financial markets last year, which reduced earnings. IG’s profits are expected to rebound strongly in 2015/16, but this isn’t a business with good forward visibility on revenues.
Tullett has also suffered from changing market conditions and a lack of visibility, but the firm appears to be gradually adapting its business and regaining some growth momentum, after a difficult few years.
In particular, I believe Tullett’s acquisition last year of oil broker PVM could prove to be well timed — going forwards, around a fifth of the firm’s revenue should come from the energy sector, adding welcome diversity.
However, HSBC could still ultimately be the best buy: current City forecasts suggest the bank’s earnings per share will rise by 15% in 2015 and by 8% in 2016, while the dividend is expected to grow by around 6.5% annually over the next two years.
