Something is up with the FTSE 100 banking set. Share prices across the likes of HSBC (LSE: HSBA), Barclays (LSE: BARC), or even Lloyds Bank have declined in the past couple of months or so. This is despite the fact that the FTSE 100 index has not fallen on average.
Macro reasons for banking shares’ price falls
I think there are at least four potential explanations for this.
#1. Relative attractiveness: One is stock rotation, which I wrote of in the context of the FTSE 250 cinema chain Cineworld recently. The essential point here is that stocks that ran up in the market rally that started in November 2020 are possibly now looking less attractive. In contrast, stocks that suffered then are now looking better.
#2. Still weak economy: The UK has seen a pandemic-related wobble too. It was expected to be fully free from restrictions last month, but the date was extended to July. This is a negative for the economy, which in turn is bad for banks. Moreover, the UK economy has been fairly muted so far, anyway. This means that loan demand could be weak too. Already mortgage demand could slow down now as the stamp duty holiday starts getting withdrawn.
#3. Rising inflation: At the same time, inflation is rising. The UK has now clocked two straight months of inflation at rates higher than the Bank of England’s target rate of 2%. If this continues, the central bank will raise rates. In addition to a weak economy, high inflation is a double whammy. This is because it means that banks will not just see muted credit demand, but may have to raise interest rates too. This can further depress loan demand.
#4. Held back dividends: And all this while, banks have had to hold back on their dividends, as directed by their regulator. This is done to preserve capital in uncertain economic times. It is a possible put-off for investors too.
Relative merits of HSBC shares and Barclays shares
With this as the context, I think that between HSBC shares and Barclays shares, the bank with a higher UK focus is less attractive. Even though it is fairly diversified itself, the answer here is Barclays. HSBC is working hard to grow its business in Asia.
But there are other aspects to consider too. HSBC has its own stresses to deal with. There are continued geo-political challenges like the Hong Kong handover and US-China tensions. Also, Chinese growth is slowing down. There are no easy answers to these problems. And they will not get resolved anytime soon either. Barclays on the other hand, can benefit from strong growth in the Americas, from where it gets 34% of its revenues.
My takeaway
Another way to consider their attractiveness is to look at their price-to-earnings ratios – Barclays’ is lower at 11 times compared to 19 times for HSBC. The last time I wrote about both stocks, I was positive on Barclays and on the fence about HSBC shares. I think the odds are less in favour of Barclays now, but between the two banks I still like it more.
