Do today’s results make this stock the star post-Brexit buy in the banking sector?

Should you buy this bank over two of its sector peers?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aldermore (LSE: ALD) has slumped by 6% today after releasing first-half results. The challenger bank has performed well during the period, but faces uncertainties due to its UK exposure. For now, results look good: its pre-tax profit increased by 50% in the first half of the year, with its net interest margin being stable at 3.6%. Its underlying cost/income ratio improved by 8 points to 45% from 53% in the same period of last year, which highlights that Aldermore remains well-managed and highly efficient.

Furthermore, Aldermore was able to record a return on equity of 18%, with its loan origination increasing by 26% to £1.5bn. And with a core tier 1 ratio of 11%, it’s well-placed to overcome the challenges that lie ahead.

UK vulnerabilities

On that topic, Aldermore and other challenger banks such as Shawbrook (LSE: SHAW) face a very uncertain future. Their UK-focus means they’re particularly vulnerable to a UK recession. While this may or may not come to fruition, it now seems almost inevitable that the UK’s economic performance will falter over the next couple of years. The Bank of England is certainly of that view. It recently downgraded the growth outlook for the UK economy in 2017 from 2.3% to 0.8%. This is the biggest downgrade to the growth forecast by the Bank of England since 1992.

Of course, an economic slowdown will bring reduced demand for mortgages and other loans, while increased unemployment will cause default rates to rise. This could impact negatively on the financial performance of Aldermore and Shawbrook, which means that investors may be better off buying a more geographically diversified bank such as HSBC (LSE: HSBA).

Global focus

HSBC operates across the globe and is exceptionally well diversified. Although a UK recession would hurt its financial performance, it wouldn’t be as severe as is the case for Aldermore and Shawbrook.

Clearly, HSBC isn’t risk-free and is undergoing a challenging period as it seeks to rejuvenate its financial performance. As part of this, it’s in the middle of a major cost-cutting and efficiency programme that could expand margins and improve profitability. However, the reality is that in the near term, HSBC’s profit is due to fall by 15% in the current year and as a result, its shares may come under pressure in the near term.

Looking further ahead, HSBC is likely to record strong bottom line-growth. Its exposure to the Asian economy is set to positively catalyse its financial performance since financial product penetration is low and increasing wealth is likely to improve demand for mortgages and other financial services across the region. Furthermore, China is transitioning towards a more consumer-focused economy where credit will be demanded in greater quantity. HSBC is well-placed to capitalise on this.

Therefore, due to its greater diversification and exposure to fast-growing markets, HSBC seems to be a better buy than Shawbrook and Aldermore. It may not be performing as well as those two highly efficient, fast-growing banks right now, but external factors may cause the tables to turn over the medium to long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »