How to Play International Banking
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
HSBC (ADR) (NYSE: HBC) is a U.K. banking giant, and giant is no overstatement. The bank has assets of over $2.7 trillion and offices in over 80 countries. Compare this to Bank of America's $2.2 trillion and Citigroup's $1.8 trillion. However, despite being the second-largest bank in the world by assets, the bank isn't invincible. HSBC tumbled some 5% last week on news that the bank could have to pay damages of nearly $1.6 billion to settle a U.S. lawsuit related to mortgage-backed securities.
Is the pullback an over reaction and offering investors a buying opportunity? Quite possibly. At the same time of the damages estimate, the bank announced that profits rose some 23% year-over-year for the first six months of 2013. Quite impressive, as the bank's cost-cutting program takes hold. The bank is still looking to make cuts, planning to save $3 billion by 2016.
There is a lot of uncertainty over whether or not HSBC will admit wrongdoing and exactly what the final damages will amount to, but HSBC has a solid balance sheet, with a tier-1 ratio that was up to 12.7% in 1Q versus 12.3% at the end of 2012.
As a result of its top balance sheet, the bank pays one of the top dividends in the industry, yielding over 4.3%; the company never stopped paying a dividend throughout the financial crisis.
Barclays (ADR) (NYSE: BCS) is another major international bank that's based in the U.K. Barclays gets around 40% of income from the U.K., 13% from the EU, 26% from the Americas, 16% from the Middle East and Africa and 4% Asia. Going forward, Barclays plans to focus on the U.K. and U.S., moving away with from Asia and Europe.
And like many of the other major banks, cost savings will be the focus going forward. The bank plans to save some 1.7 billion British pounds ($2.6 billion) by 2015, compared to its total cost base of 18.5 billion British pounds in 2012. To do this, Barclays will cut 3,700 positions. One of the remaining bright spots for the bank includes its investment banking unit, and the bank plans to continue investing in that area.
UBS (NYSE: UBS) is a Swiss bank with offices in 50-some countries. The investment bank tends to focus on global wealth management, and is over 150 years old.
Like the other major European banks, UBS is facing pressures due to euro zone sovereign debt and banking issues. As far as savings, UBS is looking to save some 5.4 billion Swiss francs (over $5.8 billion) by 2015.
At the end of 1Q, the bank had strengthened its capital position. Its Basel III common equity tier-1 ratio was up to 10.1%, already surpassing the 2019 10% requirement. By the end of 2013, UBS expects to have a tier-1 ratio of 11.5% and 13% by 2014.
For the long term, UBS is targeting a return on equity of 15% by 2015. In the interim, the bank expects ROE to be in the mid-single digits.
Barclays is the cheapest of the three on a price-to-book basis:
Part of Barclay's sub-par P/E relates to the company's presence in the U.K. But fellow UK bank HSBC is performing well and appears to be generating returns on equity that well out pace its major peers:
It appears the pullback could be a solid buying opportunity to jump into one of the world's leading banks, HSBC. Meanwhile, Barclays still has overhang related to the Europe struggles, and UBS trades inline with HSBC but has the lowest ROE.
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!