HSBC Holdings PLC – Reflecting Strong Growth in Lending and Customer Accounts

FTSE 100 listed HSBC Holdings Plc (LON: HSBA) is a London, United Kingdom-based banking company. The Company provides retail banking, commercial banking, global banking & markets, and global private banking services.

On 3^rd August 2020, the Company will announce its interim results.

First Quarter of 2020 Trading Update (as on 28^th April 2020)
Overall results reflected a challenging economic condition in March 2020; however the business showed some resilience. In the first quarter of 2020, the reported profit before tax was down by 48 per cent to USD 3.2 billion, and adjusted profit before tax decreased by 51 per cent to USD 3 billion as compared with the corresponding period of the last year. Driven by an adverse valuation adjustment in GB&M (Global Banking and Markets) and adverse market impacts in life insurance manufacturing, the reported revenue reduced by 5 per cent or USD 0.7 billion to USD 13.7 billion against the same period last year (Q1 FY19: USD 14.4 billion). Net interest margin (NIM) for the first quarter of 2020 stood at 1.54 per cent, a decline of 5 basis points from the corresponding period of the last year (Q1 FY19) and 2 basis points from the previous period (Q4 FY19). The Group experienced a robust funding and sound liquidity profile, with loans to deposits ratio stood at 72.2 per cent, and LCR (Liquidity coverage ratio) remained at 156 per cent.

Share Price Performance
 
1-Year Chart as at June-09-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 9^th June 2020, HSBC Holdings PLC’s shares closed at GBX 405.45 and were down by 3.64 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 674.80/GBX 369.35.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Also, the 14-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology


 
Growth Catalysts
In RWA, the company expects mid to high single-digit percentage growth in the year 2020. The Group enhanced support for customers through digital channels and also showed a good volume growth.

Conclusion
The Group witnessed a good performance in January and February, but the impact of COVID-19 and weakening oil prices had a significant adverse impact on the performance in March 2020. The company had faced a challenging economic condition in March 2020. The Company looks promising and remains attractive to invest for the long term. The balance sheet stayed resilient, with a CET1 ratio of 14.6 per cent. Decent growth was reported in both lending and customer accounts. The Group has shown impressive growth in the last four years, which indicates the financial resilience and sound business model of the group.
Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX  405.45 (as on 9^th June 2020) with lower double-digit upside potential based 0.71x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

Lloyds Banking Group PLC – Operating with Strong Balance Sheet Position

FTSE 100 listed Lloyds Banking Group PLC (LON: LLOY) is a United Kingdom-based company, which is engaged in the business of financial and banking services.

The Company will release its half-year results for 2020 on 30^th July 2020.

AGM Statement (as on 21st May 2020)
The Company’s main purpose is to Help Britain Prosper, and this commitment is currently more important than ever. The Group’s Board, along with its rivals, agreed to cancel the 2019 final dividend in order to provide assurance that the banking industry, through the existing crisis, had the capital it needed to support households and businesses.  Also, the Company committed not to declare share buybacks or ordinary dividends until the end of 2020. LLOY announced the acquisition of Tesco Bank's GBP 3.7 billion prime residential mortgage portfolio and accomplished the integration of MBNA. LLOY has a robust balance sheet with strong capital and liquidity position.

Share Price Performance
 
1-Year Chart as at June-09-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 9^th June 2020, Lloyds Banking Group plc’s shares closed at GBX 35.225 and were down by 4.49 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 73.66/GBX 27.12.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Also, the 14-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price to Book multiple of the LLOY was 0.4x and the same multiple was lower as compared with the Banking industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Growth Catalysts
The trading surplus remained strong with GBP 1,988 million in Q1 FY20 and showed an increase of 7 per cent versus Q4 FY2019. LLOY continues to be strongly capitalised with a Tier 1 ratio of 16.9 per cent and CET1 of 14.2 per cent at Q1 2020. In 2019, the group achieved 20 out of 22 targets, helping to address some of the social, economic and environmental challenges, which the UK faces. In 2019, LLOY delivered a solid financial performance with returns and market-leading efficiency.

Conclusion
The Group and economic outlook remains uncertain, and the final impact of covid-19 will depend on the duration and severity of the shock. The impact of lower rates, lower levels of activity, and higher impairment on the Group’s business will continue into the second quarter of 2020. The Group is supporting its customers from retail, commercial and small business through Government-funded schemes like CCFF (Covid Corporate Financing Facility) and CBILS (Coronavirus Business Interruption Loan Scheme). The Company has made robust progress since it launched the Helping Britain Prosper Plan in 2014.  The Group provides long-term sustainable success.
Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 35.23 (as on 9^th June 2020), with lower double-digit upside potential based 0.69x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 10th June 2020.

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