HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) have always been touted as two great plays on growing emerging market economies.
However, over the past 12 months or so it has become apparent that the emerging market growth boom is slowing, and these two banks are feeling the pain. What?s more, both HSBC and Standard are suffering a hangover from years of aggressive growth. HSBC is now concentrating on getting out of markets where returns are below average while Standard is trying to get to grips with its chaotic loan book after years of chasing quantity over quality.
Emerging market troubles
However, over the past 12 months or so it has become apparent that the emerging market growth boom is slowing, and these two banks are feeling the pain. What’s more, both HSBC and Standard are suffering a hangover from years of aggressive growth. HSBC is now concentrating on getting out of markets where returns are below average while Standard is trying to get to grips with its chaotic loan book after years of chasing quantity over quality.
Emerging market troubles
Slowing emerging market growth and past mistakes are weighing on HSBC’s and Standard’s shares, and this is likely to be a problem for investors for the foreseeable future.
Assuming that the best years of China’s growth are behind the country and growth in other emerging markets will also slow, emerging market-focused banks like HSBC and Standard are going to struggle to return to their post-financial crisis glory days. You see, now the banks are not only having to deal with slowing economies and contracting global trade, but they also have negative interest rates to contend with and increasingly strict banking regulations.
Negative interest rates and bank regulation will only increase HSBC and Standard’s cost base, squeezing net income as revenues stagnate.
Standard’s real problems can be found in its loan book. Falling commodity prices, slowing growth in South Asia and weak financial markets in India have formed the perfect storm for the bank. Gross bad loans rose by $2.3bn to $9.8bn during 2015, and this total could rise to $14.1bn if other loans, which are deemed in danger of being impaired, are included. Last year the bank also suffered a 13% drop in interest income. Standard’s total loan book is $260bn. Bad loans could amount to 5% of this amount now, and management has warned that more loan impairments could be booked during 2016.
With loan impairments rising and income falling, it might be wise to avoid Standard for the time being.
A more disciplined approach
HSBC seems to have taken a more disciplined approach to lending than its emerging markets peer and isn’t being forced to book the same level of writedowns. However, the bank is struggling to grow as it retreats from non-core markets.
HSBC has put nearly all of its eggs into one basket, focusing on China as its key growth market. But as China’s economy stumbles, the bank is finding it hard to deploy the extra cash taken from other regions, putting the brakes on growth. City analysts expect HSBC’s earnings per share to expand by only 2% this year. Still, if you’re looking for a value stock that offers an attractive level of dividend income, HSBC may be for you. The bank’s shares currently trade at a forward P/E of 9.5 and support a dividend yield of 7.9%.
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Rupert Hargreaves has no position in any shares mentioned. 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.