After a strong run in 2017, shares in HSBC (LSE: HSBA) are once again underperforming its UK domestic banking peers. The value of an investment in HSBC would have fallen by 3.5% since the start of the year, compared to a 2% decline for Lloyds Banking Group and a 3% gain for Barclays over the same period.
Could this be an opportunity for contrarian investors to buy into the global bank? Or, is a turnaround in its performance unlikely given the bank’s struggling profitability?
The bank’s first-quarter results certainly don’t give investors much reason to be confident about a turnaround in its performance. Pre-tax profits fell by 3% to $6.03bn, below market expectations, following yet another provision for legacy misconduct issues and rising costs, which outstripped revenue growth.
An unexpected $2bn share buyback also did little to boost investor sentiment, as the bank announced that further buybacks in the remainder of the year were unlikely.
On the other hand, there are some analysts that remain bullish on the stock, as the rising US dollar interest rate environment provides a very significant tailwind for the lender’s financials.
With its large deposit base, HSBC is particularly well-placed to benefit, given that it has a competitive advantage on the cost of funding. What’s more, recent loan growth has been encouraging, with a 2% increase in its loan book in the first quarter.
Still, I reckon there must also be evidence of further improvement on the cost side, before a re-rating in its shares becomes likely. This is because, with a forward price-to-earnings ratio of 15.9, HSBC shares already trade at a premium to its UK domestic peers. As such, HSBC can’t just rely on rising rates to boost its profitability. Looks like we might have to wait a bit longer for the HSBC share price to hit 800p.
A better option?
Elsewhere, TBC Bank Group (LSE: TBCG) may be a better emerging market bank play. I believe key financial metrics for Georgia’s largest retail bank appear to be in much better shape, while valuations are undemanding, relative to its peers and to their expected growth rates.
Of course, as a domestically-focused bank, TBC is vulnerable to geopolitical risks and external shocks affecting the Georgian economy. And although robust economic expansion in the near term is expected to support the bank’s financials, it’s also important to realise Georgia’s economy is relatively small and highly dependent on foreign direct investment.
So far though, the macro environment remains supportive, and the bank’s return on equity has continued to stay above 20%. Looking ahead, City analysts expect the bank’s adjusted earnings will grow by 15% in the current financial year. And this to be followed by a further expansion of 12% in 2019.
TBC shares trade at just 8 times its expected earnings this year, and a mere 6.9 times its expected earnings in 2019, which compares favourably with its banking peers — particularly its closest rival, BGEO Group, which trades at 7.5 times its expected earnings in 2019.