HSBC Holdings (LSE: HSBA) and Standard Chartered (LSE: STAN) have significantly underperformed the wider market this, which has attracted the attention of value hunters. Value investors live by the mantra that the best bargains are usually found in the most unloved sectors of the market, and these two Asia-focused banks are definitely looking unloved this year.
Year-to-date HSBC and Standard Charted have underperformed the wider FTSE 100 by 9% and 38% respectively excluding dividends. Including dividends, HSBC has underperformed 6.9% year-to-date and Standard Chartered has lagged the broader market by 33.9%.
Most people just can’t resist a good bargain and looking at the charts of Standard Chartered and HSBC over the past three years or so; these banks certainly seem to be trading at bargain prices. However, even after recent declines there’s no guarantee that Standard Chartered and HSBC won’t fall further as, even in the long-term, these two banks are facing major headwinds that could hold back growth.
Standard Chartered and HSBC are actually facing the same problems, although in each case troubles are having a different effect on the underlying business. The two banks are struggling with a huge structural change that’s impacting the whole banking industry. For example, since the financial crisis the banking sector has become more competitive, especially across Asia where local peers have started to take market share from larger international banks like HSBC and Standard Chartered. At the same time, international banks are having to deal with more stringent regulatory demands, which are hampering efforts to cut costs and restricting the ability to lend. Regulatory pressures have also forced HSBC and Standard Charted to leave some markets, which has hit sales.
Overall, these two banks are facing the perfect storm of problems. Costs are rising, and sales are sliding, hampering efforts to increase capital buffers and generate excess capital to be reinvested back in the business. As a result, it’s clear that these banks deserve a lower valuation than they’ve been given in the past, and there’s no telling how much more of an impact these structural issues will have on revenues and profits going forward.
Moreover, Standard Chartered has had to ask shareholders for more cash, by way of a rights issue, three times in the past seven years (costing the bank £180m in fees, but that’s another argument) making it clear that the business is struggling. Another rights issue can’t be ruled out. On the other hand, HSBC has destroyed billions of dollars of shareholder funds over the past decade through a series of acquisitions which ended up costing the bank money. Almost all of these acquisitions have now been undone.
As a result of structural issues in the banking industry and the two banks’ past mistakes, it looks to me as if Standard Chartered and HSBC could be value traps.
