There is reason to believe that HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) might surprise investors in the second half of 2015 and beyond — but just how likely is that?
Let’s look at forecasts and their implied valuations.
HSBC: Cheap Enough To Deserve Your Attention
Revenues will likely hover between $60bn and $63bn into 2017 and, assuming a steady net income margin at 25%, which seems a reasonable estimate, the bank will report a bottom line of up to $15.7bn.
Such a level of net economic profitability could be higher if HSBC manages to re-locate outside the UK, but it could also be lower if large write-downs occur.
A base-case scenario — according to which write-downs will be small, tax benefits will be low and its total shares count remains constant over time — indicates that HSBC shares trade on net earnings multiples of between 12x and 9x over the next 30 months, which isn’t a prohibitive equity valuation, to be honest, particularly if more accommodative monetary policies ensue.
If that proves to be the case, you’d have likely done well to add exposure to HSBC at its current level of about 580p.
Its stock trades at a 6% discount to tangible book value (P/TBV), which is another indication that capital gains could be on the cards. Also consider that such an equity investment should reward investors even if the bank shocked the market with a less generous dividend policy going forward.
Most analysts have become bearish over the last 12 months, and according to consensus estimates from Thomson Reuters, HSBC should trade around 620p, which implies a P/TBV of about 1x — but analysts at Citi pushed up the stock today, giving it a buy rating while upping their price target to 635p from 625p.
Standard Chartered: On The Right Path But More Time’s Needed
In order to bet on Standard Chartered, investors must believe that its net earnings bottomed out in 2014 and that its restructuring plan will pay dividends under new management.
An article in The Financial Times, headed “Bill Winters wrests control at Stanchart“, is making the rounds in the market today — it’s based on a letter to the bank’s employees, in which Standard’s CEO Bill Winters explains the logic behind the current reshuffle.
Latest news suggests that investors may be right to be more confident that the bank will reward shareholders. Indeed, I’d keep a close eye on its stock performance, but I am not convinced that the the risk is worth the possible reward as yet.
Standard Chartered is projected to report sales of between $18bn and $19bn and a level of net profitability that should be several basis points lower than that of HSBC over the medium term. Given a base-case scenario based on similar assumptions, though, the shares of Standard Chartered trade in a valuation range that isn’t too different from that of HSBC based on its forward net earnings and P/TBV.
Shareholders enjoyed a great start in 2015, but there remains doubts that Standard Chartered will be able to avoid the same mistakes in future — corporate governance remains an issue, although it is being addressed.
