Throughout 2015 the consensus outlook for HSBC (LSE: HSBA) has remained quite bright and in more recent times, it has also begun to improve for Standard Chartered (LSE: STAN).
Regardless of the analyst community’s position on either of the two, each company’s share price has fallen persistently over the last 12 months.
Now, with global equity markets appearing to fall apart at the seams and the Chinese economy slowing further, investors could probably be forgiven if they choose to shun these two for a bit longer.
However, for those who are still unsure about dipping a toe in the water, here are a few points to consider in relation to both companies.
Compelling valuations & attractive income prospects
Many of the positive arguments surrounding both banks are centred on valuations, although the outlook for dividends is no longer as bad as it was either.
On a valuation basis, both companies are trading at levels not seen since the Asian financial crisis in the late 1990s, with Standard Chartered priced at 0.55 times tangible book value and HSBC at 0.61 times.
It has already been established that Standard Chartered will pay nothing to shareholders in in the form of dividends during 2016. However, assuming an intermittent meltdown in Asia can be avoided, there shouldn’t be too many remaining impediments to the bank’s ability to restart dividends once into 2017.
HSBC continues to pay dividends and management has already indicated its willingness to consider special distributions to shareholders after the bank meets its targets for reducing risk-weighted assets.
Furthermore, if today’s consensus estimate is correct then it’s likely that HSBC will pay dividends that provide for a yield in excess of 7%, with the payout covered 1.5 times.
Risks to consider
Both banks are exposed to the risk of increasing numbers of non-performing loans in Asia, as well as the prospect of yet more conduct-related regulatory charges. Each of these issues has the power to undermine the investment case for both banks.
In addition, Standard Chartered has also ‘doubled-up’ its exposure to emerging markets worldwide through large simultaneous bets on commodity markets, mostly in the form of loans to commodity trading companies.
This could increase the degree to which the bank suffers if the emerging economies and world commodity markets take another turn for the worse.
Summing up
HSBC is dependent on earnings growth, tight cost containment and a reduction in risk-weighted assets for its ability to offer sustainable dividend growth.
However, its current high yield is considerably above that available elsewhere in the banking sector, its balance sheet remains stable and its valuation undemanding.
Standard Chartered may have thrown everything but the kitchen sink at investors, in terms of bad news, during recent quarters. However, the lack of a dividend means that investors are reliant entirely on share price appreciation for returns over at least the next 12 months.
Taking into account the ‘doubled-up’ nature of the risks surrounding Standard Chartered and the greater immediate returns available via HSBC shares, if it came to a toss-up between the two it would seem that there can only really be one choice for the conservative investor.
