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The collapse of US tech lender Silicon Valley Bank -- SVB Financial (NSQ:SIVB) -- has triggered a sell-off in banking shares across the market. Despite this unfortunate event, an evenly-weighted basket of FTSE 100 bank shares would still have beaten the index by almost 10% over the last year.
Indeed, until recently, rising interest rates seemed to have signalled the end of a decade-long period of low profitability and shareholder scepticism:
FTSE 100 (grey) vs a simulated portfolio (blue) containing HSBA, BARC, STAN, LLOY & NWG
Given that the SVB failure is currently the big story in banking, I’ve added a short comment on this situation here.
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Are other banks at risk? SVB’s failure appears to have resulted from the bank’s decision not to hedge its interest rate risk. As a result, the bank suffered an unaffordable $1.8bn loss when it sold $21bn of long-term assets to fund surging customer withdrawals.
In effect, SVB’s management appears to have been betting that rates would stay low. Not a great idea.
From what I can see, this ultimately a failure in the regulation of US regional banks. My understanding of UK banking regulation is that this situation would not be allowed to occur with UK-regulated banks.
Certainly, I think it’s almost inconceivable that any of the big banks I’m writing about here could suffer this kind of problem.
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2022 results season: As this year’s results season winds to a close, the UK’s big banks have emerged with mixed report cards.
The good news is that all five appear to be more profitable and in better financial health than at any point since the 2008 financial crisis.
Last year’s results from all five banks showed a substantial increase in interest income, improved lending margins, and strong capital positions. Increases in expected bad debt look relatively modest and manageable, so far. Shareholders are being rewarded with increased dividends and substantial share buybacks.
The less-good news is that banks’ management have taken care to paint a more cautious picture of the outlook for the year ahead. The general sense of their comments was that net interest margins (and possibly interest rates) may already have peaked.
A combination of macroeconomic factors and tougher competition may erode some of the gains made last year. There’s a risk of higher bad debt charges.
Despite this uncertainty, Stockopedia’s algorithms remain very positive about all five:
My view is broadly positive too, at least from an income investing perspective. In the remainder of this piece I’ll look at some of the bank’s key metrics and consider the outlook in more detail.
Do the big banks still offer opportunities for investors, or is the good news already in the price?
I should point out that I have an interest here. NatWest and Standard Chartered are both members of my rules-based SIF virtual portfolio. I also hold both of these shares in my personal portfolio.
I’ve included all five of the FTSE 100 banks in the mini portfolio I’ve illustrated above. But of course, these banks are all very different businesses:
Lloyds Banking (LON:LLOY) & Natwest (LON:NWG): UK retail banks with heavy exposure to mortgage lending, credit cards and business banking. Performed well last year, but macroeconomic headwinds mean much slower growth is expected this year.
Barclays (LON:BARC): A combination of UK retail banking and US-UK investment banking. Profits fell sharply last year due to reduced income from investment banking in subdued post-pandemic markets. The outlook for this year suggests earnings could fall again.
HSBC Holdings (LON:HSBA): generated 60% of profits in Asia last year and also operates in the Middle East and North Africa, as well as the UK. HSBC’s profits are expected to recover strongly in 2023, as China reopens.
Standard Chartered (LON:STAN): 95% of group profits came from Asia, Africa and the Middle East in 2022. Strong growth last year is expected to be maintained through 2023 and 2024.
While these banks have outperformed the FTSE 100 in aggregate over the last year, their individual performance has been much more varied:
Looking ahead, these big banks face various challenges in 2023.
In the UK, we’ve got a sluggish economy, higher interest rates, and a slowing housing market. This could translate into an increase in bad debts and a slowdown in new lending. The big banks are also under pressure to pass on higher interest rates to savers as well as borrowers.
This combination of factors explains why UK banks’ net interest margins are not expected to expand much further this year.
HSBC and Standard Chartered faced difficult conditions in China last year due to Covid-19 lockdowns and a dramatic property market slump.
However, HSBC chairman Mark Tucker expects the reopening of China and government measures to stabilise its property market to provide “a significant boost for its economy”. Even so, I fear that the risk of bad property debt may not yet be fully resolved, while the political risk of operating in both China and the UK/US remains a potential concern.
Standard Chartered’s emerging market exposure is more evenly split across Asia, the Middle East and Africa. That appeals to me, but these markets aren’t without challenges either.
Strong outlook for profits: according to the latest consensus forecasts on Stockopedia, all of these banks are expected to report profits at the upper end of their five-year range in 2023 and 2024.
This chart shows net profit for each of these banks since 2017, including forecast numbers for 2023 and 2024:
One reason for the banks’ rising profits is that their profitability has improved. In other words, they are generating stronger returns on their assets.
Using the return on tangible equity (RoTE) figure favoured by banks, four of these five generated a 10% return last year:
The only laggard was Standard Chartered, but its RoTE is expected to reach 10% in 2023.
My conclusion so far is that the UK’s FTSE 100 banks are in good health and are performing reasonably well. With this in mind, are they attractively priced as potential investments?
To find out, I’ve selected a mix of forward and backward looking metrics to allow me to compare these stocks.
Bank | Price/tang. book value | CAPE 10y | Forecast div. yield | Forecast P/E | 12m fc rolling EPS growth |
Lloyds | 0.97 | 11.9 | 5.8% | 6.5 | 4.1% |
Barclays | 0.42 | 7.8 | 5.6% | 4.8 | -12.4% |
NatWest | 1.05 | 25.3 | 6.5% | 6.0 | 9.7% |
HSBC | 0.97 | 10.6 | 8.4% | 6.5 | -3.4% |
StanChart | 0.6 | 13.5 | 2.7% | 7.0 | 22.3% |
Price/tangible book value: Lloyds, NatWest and HSBC are now trading close to their tangible net asset value. I think this reflects their stronger profitability and more stable outlook.
Barclays and Standard Chartered lag on profitability and have more to prove in terms of strategy. However, the discount to book value could signal an opportunity for value investors.
CAPE 10y: this metric compares the current share price to 10-year average earnings per share. It can be useful for cyclical stocks.
Once again, we can see that Barclays is trading in value territory. Most of the other banks’ CAPE ratios suggest to me that their shares are fairly valued, but not expensive.
NatWest’s result may be distorted by the bank’s slower recovery from the financial crisis, so I’m not sure how meaningful this is.
Dividend yield: with the exception of Standard Chartered, I think all the banks offer attractive dividend yields.
Forecast P/E & EPS growth: Barclays’ cheap rating reflects falling earnings expectations. As with price/tangible book value, HSBC, NatWest and Lloyds are all on a par.
For me, the standout attraction here is Standard Chartered; the forecast P/E of 7 looks affordable to me, if forecast earnings of 20%+ can be delivered.
The outlook for the big banks may be more muted in 2023, but these FTSE 100 stocks still offer the potential for stable profits, attractive dividend yields and improving returns on equity. On balance, I think they could be attractive for investors seeking long-term buy-and-hold equities, especially if dividends are important.
The main concern I have is that in the UK, at least, the market is structurally mature and low growth. However, I think that pure-play retail banks Lloyds and NatWest both look in good shape and reasonably valued. Both offer usefully high dividend yields.
Barclays is undoubtedly cheap and could be an interesting value play. The company’s investment banking division could theoretically also support stronger growth. But it’s also proved to be a burden at times.
Personally, I have reservations about Barclays’ business model and – more subjectively – its culture. The company’s Neutral StockRank style also suggests some extra risk, compared to the more positive Turnaround and Super Stock ratings of the other banks.
Barclays’ isn’t a stock I’d buy, but I can see value at current levels.
Finally, Asia-focused HSBC and Standard Chartered both look affordable to me and have stronger profit growth trajectories than most of the UK-only banks.
However, HSBC’s heavy political and economic exposure to China remains a concern for me. Standard Chartered’s broader geographic diversification means that I’d favour the smaller bank.
Disclosure: At the time of publication, Roland owned shares in Natwest Group and Standard Chartered.
About Roland Head
I'm an investment writer and analyst, with a particular focus on systematic investing and dividends. I look for quality stocks with above-average returns, strong cash generation, and attractive valuations - always with dividends.
In my earlier life, I worked as an systems engineer in telecoms and IT. The quantitative, rules-based approach required for this kind of work suits me and has certainly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000/1, when I was working for a large and now defunct telecoms group.
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Some of the smaller regional banks perhaps, but don't see any read across to the bigger lenders, which could even benefit as people move deposits to larger institutions. SVB had some very specific issues - extremely concentrated exposure to tech start ups who were busily withdrawing their money as funding dried up, an unusually high and very risky exposure to long dated government bonds with no interest rate hedging in place, and the fact that hardly any of the deposits were insured. The likes of Natwest and the others mentioned here have much more diversified deposit bases and are strongly capitalised. Agree not a huge amount of growth on offer, but a very good and steady source of cashflows.
Agree the theat of a windfall tax is the only thing holding me back a bit. I think the banks deliberately downplayed their earnings outlook as they don't want to attract attention, but think earnings will come in much higher than guidance if rates stay at these levels. I think they were also far too prudent in terms of impairments, so could see upside there too as these are unwound.
Some talk about Credit Suisse AG (SWX:CSGN) could be next, have you seen Paul Hill's post about SVB?
Arbuthnot Banking (LON:ARBB) probably the best uk bank to hold for the next year, results next week discount to book value, dividend (special?), director buying and the bank set up for these high interest rates. Two profit upgrades for 2022 figures likely 2023 to be upgraded.
Thanks for flagging Arbuthnot Banking (LON:ARBB) I held this years ago but not looked into it for a while - seems to be trading very well so will take a closer look.
The problem with Arbuthnot Banking (LON:ARBB) is the spread, which is about 6% at the moment.
All the Euro banks are selling off right now...
Credit Suisse is currently down 21% today and seems to be going lower. I've been watching the live price. Looks like Credit suisse is in free fall and about to go belly up?
Bloomberg covering it live "Credit Suisse collapses most on record":
Update:
Credit Suisse shares slide 21%, trading halted after Saudi backer rules out further assistance
I guess I was a bit too hasty in going into Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) on Monday!
Should have waited for the CS news. Having said that, there should be a good rebound tomorrow, as of course the SNB came to the rescue and pledged unlimited backstop for CS. One expects nothing less, because its written in stone in the central bank playbook.
Now to see if there's another crack somewhere else in the banking system...
Does this etf produce a dividend? And/or are there other banking ETFs that do?
According to the motley fool, SVB was without their CRO, chief risk officer for 9 months until January this year.
Only the big banks in America have the same regulation rules as all banks in the UK. Meaning that the smaller banks in the US were not restricted as to how much long term assets they are allowed to hold where as the bigger banks and European banks can not take the same risks.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Excellent article , well researched and I like the timing , albeit who knows how this pans out in the very short term.