The Covid-19 pandemic and all the unknowns facing the economy have inflicted great pain on FTSE 100 banking shares. Today I’m looking at the share prices of Lloyds Banking Group (LSE: LLOY) and HSBC Holdings (LSE: HSBA) to discuss what investors may possibly expect from these stocks in the coming months. So far in 2020, LLOY and HSBA shares are down about 51% and 30% respectively, which means the shares are clearly in bear market territory.
On 30 April, the FTSE 100 banking member released its Q1 2020 interim statement. Management warned that “the impact of lower rates, lower levels of activity and higher impairment on the group’s business will continue into the second quarter”. As a result, it withdrew its previous earnings guidance for the year.
Anyone buying into the Lloyds share price is indirectly investing in the health of the UK economy. The group has the biggest exposure of all the high street lenders to the UK mortgage market. Its credit card business is also important.
Bank earnings often fall as provisions for loan losses due to non-performing loans increase.Therefore consumer defaults could adversely affect Lloyds until the economy stabilises. However, bank earnings can change substantially over the course of an economic cycle. Put another way, if the economy gets on track sooner rather than later, bank shares would also start going up.
Therefore, many analysts regard price-to-book (P/B) ratio as a better gauge than a trailing P/E ratio for financial institutions. The group’s P/B stands at 0.4. The industry average is 0.75.
Another ratio of interest is a bank’s return on equity (ROE). It measures how effectively management is able turn a profit with the bank’s assets. Generally, the higher the ROE, the better, with the caveat that management doesn’t make risky loans or take too much leverage. Its five-year average ROE stands at 4.7. In 2015, it was 1.1. In other words, the bank’s position has improved significantly over the years.
At this point, much of the gloom may already be priced-into the stock price. I’d look to invest, especially if the shares fall below 30p.
On 28 April, HSBC announced its Q1 2020 earnings. Pre-tax profits were $3.2bn compared with $6.2bn a year ago. Yet it kept its medium-term financial targets. It is also well capitalised and likely to weather the current storm. The group’s P/B ratio is 0.49. Its five-year average ROE stands at 5.2%.
HSBC is one of the largest financial organisations worldwide. It commands a respectable amount of clout in Asia, especially in China and Hong Kong. Profit will be the key driver of bank shares in a post-coronavirus world.
As incomes rise in Asia, deposits and loan growth could rise with it. I expect the region’s economic growth in the coming years to support the HSBA share price. However, its short term is likely to be volatile. But I’d buy, especially if the price falls toward 350p.
Can bank shares recover in 2020?
On 31 March, many financial institutions, including Barclays, HSBC, Lloyds, RBS, and Standard Chartered, axed their dividends and share buyback programmes. So justifying an investment in either stock for passive income has now become impossible.
Nonetheless as our economy starts to open up, I believe bank shares are likely to stabilise and even get on a slow growth trajectory. Long-term investors may possibly consider buying the dips in both Lloyds and HSBC shares.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.