Will HSBC Holdings plc and Standard Chartered plc continue last year's fightback in 2017?
There were plenty of big winners on the FTSE 100 last year, with oil and commodity stocks leading the charge. There have also been some surprising recovery plays in other sectors, including these two banking stocks.
Big trouble in China
Global banking giant HSBC Holdings(LSE: HSBA) supposedly enjoyed one major advantage over its UK-listed rivals, its exposure to fast-growing Asia and in particular China. This suddenly turned into a millstone as the region slowed sharply, and the wheels started to come off the China growth story.
This time last year it was slashing tens of thousands of staff, and freezing pay and hiring, as part of plans to cut as much as $5bn from its cost base by the end of 2017. However, as I wrote last February, this was a great opportunity, especially with the stock trading at just over nine times earnings, and yielding almost 7%. Since then, plenty more investors have come round to this way of thinking.
I was always slightly bemused by the short-termism that led so many investors to shun HSBC, given that it has few of the structural deep-seated problems afflicting the likes of, say, Royal Bank Of Scotland. Even its massive dividend seemed to be reasonably safe, although today's 6.3% yield is only covered 1.3 times.
HSBC did well last year, but not so well that it ate up all of its growth prospects for 2017. It currently trades at 13.1 times earnings and earnings per share (EPS) are forecast to rise 7% this calendar year, after three years of consecutive drops. Capital strength is also in its favour. Now let's just hope that China survives 2017 in good shape.
Asia-focused rival Standard Chartered(LSE: STAN) was hit even harder by the China slowdown, although slack management was also to blame, which left the bank facing massive loan impairments and plunging revenues after its over-leveraged and over-ambitious investment programme.
New-ish boss Bill Winters has a massive turnaround job on his hands, but with the stock up more than 17% over the last 12 months, markets are clearly happy to give him the benefit of the doubt. Global diversification is by and large a good thing, but it also means the benefits of Standard Chartered's rising income from China and Hong Kong have been undermined by weaker performances in the Africa & Middle East and Europe & Americas regions.
Current loan impairments are high by historic standards at $596m but that's an improvement on a year ago, when they topped $1.2bn. Standard Chartered is headed in the right direction, but has a long road ahead of it. Revenues and profits are forecast to pick up in 2017, undoing some of the damage of recent years.
However, management has warned that conditions remain "challenging", the Bank of England has alerted investors to the bank's "capital inadequacies", and plenty of analysts have warned that President Donald Trump could prove bad news for Asia, if his stimulus blitz leads to higher interest rates and a stronger dollar, or if he triggers a trade war. Standard Chartered is a risky play although it should still prove rewarding over a five-year timeframe. Maybe wait for a buying opportunity if a market sell-off trims its current pricey forecast valuation of 18.4 times earnings.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.