“The outlook has changed,” the company said. With interest rates in the “US dollar bloc” now expected to fall rather than rise, geopolitical issues “could impact a significant number of our major markets.”
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A common chorus
The big London-listed banks have all been singing the same tune. The macro-economic outlook is deteriorating, they’ve been chorusing as one. And that matters big-time for those holding shares in these mega-cyclical beasts, in my opinion. Why? because any general economic slump will likely take the banks’ profits, dividends and share prices down. And don’t expect a low-looking valuation to save you, I’d say because it probably won’t.
HSBC reckons the UK’s departure from the European Union is creating uncertainty “in the near term.” But, on top of that, the outlook for interest rates and “revenue headwinds” mean the firm expects to miss its target of a 6% Return on Tangible Equity (RoTE) in the US by 2020. The directors are, they said in the report, managing operating expenses and investment spending in line with the “increased risks to revenue.”
Meanwhile, the directors held the interim dividend flat, which continues a record of generally flat dividends stretching back at least six years. I think that speaks volumes because the directors’ decisions about dividends in any company reveal their thinking about current trading and the outlook. In this case, I’m reading ‘caution’.
Despite my concerns, the directors also announced their intention to start a $1bn share buy-back programme “shortly”, which could cheer shareholders. But I’m not getting involved with the stock. Instead, I’d rather invest in a firm with a strong niche in the market such as TP ICAP (LSE: TCAP), the interdealer broker operating in the financial markets.
Well prepared for Brexit
Today’s half-year figures from the company are broadly flat. Revenue drifted up about 1.3% but earnings per share were the same as the equivalent period last year. The directors held the interim dividend at last year’s level too.
Chief executive Nicolas Breteau said in the report the firm delivered a “resilient” performance and kept up its operating margins “despite a decline in trading amongst the investment banks, and additional costs driven by increasing regulation and Brexit.”
But the firm has been preparing for all Brexit outcomes, including the UK leaving the EU “without a deal.” The directors reckon that 90% of the company’s broking revenues would be unaffected. However, they did concede that the Brexit process is a significant regulatory and operational challenge. To make sure the Europe-focused part of the business runs smoothly after Brexit, TCAP has set up a new company in Paris.
Looking ahead, Breteau said TCAP has made “considerable progress” planning for growth from 2020 onwards. Meanwhile, with the share price near 286p, the forward-looking valuation seems undemanding, with the price-to-earnings rating for 2020 just over eight and the anticipated dividend yield a little over 6%. I’d rather take my chances with TP ICAP than with HSBC Holdings.