HSBC Holdings Plc

FTSE 100-listed HSBC Holdings Plc (LON: HSBA) is a London, United Kingdom-based Banking Company.

On 23 February 2021, the Company will announce the annual results.

Rationale for Valuation – Buy at GBX 378.10

• Price/Book Value multiple of the HSBA is currently lower than the Banking Services industry, which shows that shares are undervalued against the industry.
• In Asia, the Company intends to increase the rate of investment, particularly in wealth, the Greater Bay Area, south Asia, trade finance and sustainable finance.
• In the last one month, the Company has delivered a decent return of ~22%, which is higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares are trading well above the short-term support level of 20-day (approximately GBX 347.96) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The first half of 2020 has been marked by unprecedented global economic events like Covid-19 mayhem and Brexit uncertainties.
• Further, the Covid-19 outbreak has impacted many of the customers’ business models and income generation stream.

Recent News

On 11 November 2020, HSBA has issued €1 billion of Fixed to Floating Rate Notes due 2026 (at 0.309%) and €1 billion of Fixed to Floating Rate Notes due 2031 (at 0.770%).

Q3 FY20 Trading Update (as on 27 October 2020)

(Source: Company Website)

• Common equity tier 1 capital (CET1) ratio increased by 0.6% to 15.6% against the previous quarter (Q2 FY20: 15.0%), reflecting a decrease in RWAs (on a constant currency basis), foreign currency translation differences and capital generation through profits.
• Led by lower revenue, the reported profit after tax was down by 46% year-on-year and reported profit before tax decreased by 36% year-on-year.
• Net interest margin (NIM) was down by 36 basis points ('bps') year-on-year. While NIM was also down by 13bps from 2Q20.
• The interest rate reductions impacted the Company on the deposit franchises across all global businesses.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

For 2020, the ECL charge is trending towards the lower end of the US$8 billion to US$13 billion range. Further, the Company expects lower global interest rates, with some stabilisation as HSBC move into 2021. It expects to exceed the US$100 billion gross risk-weighted asset (RWA) reduction target by the end of 2022. It will also seek to pay a conservative dividend if circumstances allow. HSBC has shown decent growth in the last four years, which indicates the financial resilience and sound business model of the Group. Despite the challenging economic conditions, the Company's liquidity and capital ratios strengthened further in the quarter. Moreover, the Company looks promising and remains attractive to invest for the long term. The stock made a 52-week low and high of GBX 281.50 and GBX 602.90, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on HSBC Holdings at the current market price of GBX 378.10 (as on 18 November 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 0.66x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Lloyds Banking Group Plc

Lloyds Banking Group Plc (LON: LLOY) is a FTSE 100 listed Banking Company, which is engaged in the business of financial and banking services.

Rationale for Valuation – Buy at GBX 34.85

• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the LLOY are currently lower as compared to the corresponding multiples of the Banking Services industry. It reflects, shares are undervalued against peers.
• In the last one month, the Company has delivered a decent return of ~31%, which is higher as compared to the FTSE 100 Index.
• Despite the uncertain market outlook, the Company is well-positioned to sustainable and superior for a long-term period.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 30.50) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The external risks faced by the Company may also impact the success of delivering against LLOY’s long-term strategic objectives.
• The outlook remains uncertain, and the economic fragility will continue for at least the rest of the year. This may impact financial performance.

Recent News

On 16 November 2020, the Company has launched an Offer to Exchange the sterling-denominated subordinated securities, which was at approximately £2.0 billion outstanding.

Q3 Trading Update (as on 29 October 2020)

(Source: Company Website)

• The Company has shown an increase in retail current accounts and has a strong pipeline of open mortgage book.
• It witnessed a strong balance sheet, with a growth in retail current and savings accounts and commercial deposits.
• Led by the removal of the uplift for Government support, Moody's downgraded Lloyds Bank plc from Aa3 to A1, with a stable outlook.
• The total income decreased by 13% year-on-year, due to lower other income and lower interest rates.
• In the nine months to 30 September 2020, the Company’s profit before tax decreased by £1,942 million year-on-year, due to an increase in impairment charge.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

In Q3 FY20, the Company returned to profitability, reflecting the resilience of the business model. It also experienced improved trading performance in Q3 FY20, with an increase in digital activity and an increase in the open mortgage book. The Company witnessed a recovery sign in the core market, mainly in the housing market and consumer spending, but the outlook stays uncertain. Despite the uncertain environment, the LLOY’s business model and financial strength will ensure that it can continue to help Britain recover and support the customers. Overall, it has strong foundations and unique competitive strengths position, which shows that LLOY is well-positioned for the long-term and provides superior and sustainable returns for the future. The stock made a 52-week low and high of GBX 25.59 and GBX 73.66, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Lloyds Banking Group at the current market price of GBX 34.85 (as on 18 November 2020, before the market close at 9:10 AM GMT), with lower double-digit upside potential based on 0.72x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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