The pandemic presents an ongoing struggle for most businesses, driving down both share prices and profits. However, in the past six months, these two FTSE 100 shares have risen 35% and 55% respectively. After this impressive run, I’m going to take a closer look at the investment case of these banking stocks.
HSBC (LSE: HSBA) shares are down 8% year-to-date. However, the bank recently announced that its dividend payments will resume, an encouraging sign of financial health. There are some other reasons to be bullish about this stock’s investment case too.
HSBC’s overwhelming presence in Asia is a massive asset. Covering 98% of Asia’s total GDP, the bank has massive market reach, as well as consumer loyalty. By 2030, Asia is expected to contribute around 60% of the world’s economic growth. This is encouraging for the FTSE 100 share’s growth projections.
However, there are some risks that need considering. HSBC revised its return on tangible equity target (RoTE) of between 10% and 12%. It is now targeting a medium-term RoTE of around 10%. This is essentially the bank reducing its profitability forecasting, something no investor wants to hear.
Banks must also face the growing threat that cryptocurrencies pose. The world seems to be moving in a crypto-centric direction, facilitating faster, more secure payments and doing away with the need for cash. This is a huge worry for banks like HSBC, which must quickly adapt to this problem.
Overall, although HSBC’s Asian growth is encouraging, there are still medium-term profitability problems. Nonetheless, at current share prices, I think this FTSE 100 share could be a solid addition to my portfolio.
Lloyds (LSE: LLOY) has risen a hefty 55% in the last six months and is up 22% in share price for the year. The reopening of the UK in the near future should provide a well-needed boost to the economy, complementing share prices. This huge increase in spending could lead to a period of post-pandemic inflation. While this is bad news for growth stocks, it’s good news for banks as it increases their net interest margins.
The bank currently trades off a price-to-book (P/B) ratio of 0.69. For context, a P/B ratio of under 1 shows the stock is being traded at a lower share price than current book value. This may signify the stock is undervalued, which is an important consideration for the investment case.
Lloyds’ 2020 Q3 update sent share prices soaring, revealing the firm had delivered a pre-tax profit of £620m. This contrasted with the £676m loss for Q2, down from a £1.3bn profit in the same period of 2019. The firm was able to turn round a statutory profit after tax of £1.4bn for 2020. Chief Executive Antonio Horta-Osorio stated these results demonstrated the strength of Lloyds’ “balance sheet and strategy”.
However, Lloyds bank is primarily UK-focused. This means that it is heavily reliant on UK economic performance. Although UK lockdowns are easing, there is no promise of a bright economic future. This is a disadvantage when comparing this FTSE 100 share to HSBC.
All things considered, I think this FTSE 100 share is solid. However, with such a domestic focus, I think there are better bank stocks I could add to my portfolio.
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Dylan Hood has no positions in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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.