Why are Barclays plc and HSBC Holdings plc priced at half their value?

Why is the market still so bearish on Barclays plc (LON: BARC) and HSBC Holdings plc (LON: HSBA)?

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The woes of Barclays (LSE: BARC) during the Financial Crisis are no secret, but why are shares of this global giant still trading at a mere 0.42 times the company’s book value? The main reason comes down to one number: £51bn. This is the amount of non-core risk-weighted assets still on the bank’s books that it’s trying to dispose of. Progress is being made, as £3bn worth was sold in Q1 and a further £3.4bn is expected to find a new home later this year. However, the £603m quarterly loss from these non-core assets was more than enough to take the shine off the £950m profit from core operations last quarter.

A second anchor on share prices is the large investment bank that’s still weighing down stellar retail banking operations. The investment bank brought in £701m in pre-tax profits for the quarter, about the same as the retail bank’s £704m contribution. Yet the retail bank contributed more profits with a fraction of the investment bank’s resources. This led to return on tangible equity (RoTE) of 7.3% for the investment bank compared to a whopping 20.5% for the UK retail bank.

A third issue is the persistent high costs, restructuring charges and litigation expenses from which the bank has still yet to escape. Barclays’ cost-to-income ratio for the first quarter, while a minor improvement year-on-year, was still a staggering 76%. This is significantly worse than competitor Lloyds’ 47.4%, for example. Barclays still hasn’t been able to escape the spectre of regulatory fines either as litigation and conduct fines topped £4.3bn in 2015 alone. These issues combined with the highly cyclical nature of banking leave me pessimistic that Barclays’ shares will be living up to the bank’s book value anytime soon.

Emerging markets and operating costs

Shares of HSBC (LSE: HSBA) aren’t much better, trading at 0.43 times the lender’s book value. Like Barclays, HSBC is also attempting to rid itself of a massive amount of under-performing assets, in this case assets built up during the boom years in emerging markets. The target for HSBC is reducing £290bn of risk-weighted assets, about half of which has already been accomplished. The plan has long been to redeploy a majority of these assets to the bank’s core Asian operations, but the continued slowdown in China means this capital could be returned to shareholders instead.

The second reason the bank’s shares trade at a subdued valuation is high operating costs. Management is aiming to cut $4.5bn to $5bn in costs annually. This will entail slashing as many as 50,000 jobs and will come alongside selling non-core assets such as Brazilian operations. Bringing out-of-control costs down will be critical as RoTE in Q1 fell from 13.1% to 10.3% year-on-year.

HSBC’s strength in emerging markets is also weighing on the company now that plummeting commodity prices are harming economies from Argentina to South Africa. This has filtered through to HSBC’s balance sheet in the form of loan impairments, which more than doubled year-on-year to $1.1bn. All of these issues together will impinge on HSBC’s growth in the years to come. But if high costs can be wrangled down and the bank can refocus on its Asian breadbasket, I see more hope for HSBC shares to live up to their book value than Barclays.

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »