It's been a rotten year for big financial stocks. Yesterday I reported on ailing Lloyds Banking Group, Aviva and Prudential. Today, I'm holding a bedside vigil for stricken banks Barclays(LSE: BARC), HSBC Holdings(LSE: HSBA) and Royal Bank of Scotland(LSE: RBS). Recent share price performance has left them on the long-term sick list, with Barclays down 40% in the last year, HSBC down 32% and RBS off 38% at time of writing.
All three have been hit by the same thing: growing fears for the global financial system as central bankers expend the last of their ammunition while failing to hit their targets. In Japan, Prime Minister Shinzo Abe's three arrows of monetary expansion have failed to get the economy, wages or confidence growing again, let alone reduce the world's biggest debt mountain. The European Central Bank's EUR1trn monetary blitz can't resolve the structural problems of the Eurozone. The US Federal Reserve looks like backpedalling on plans for more interest rates as growth slows. UK has a possible Brexit and a massive current account deficit to deal with, and I haven't even mentioned China.
Investors have been watching central bankers and politicians kick the can down the road for so long most have simply shut their eyes and smelled the stimulus. Now they've opened them again, and see that the road ahead ends in a vertical cliff.
Get the balance right
While any crash will inflict further pain on banking investors it shouldn't be fatal. All three banks have worked successfully to shore up their balance sheet in line with new, stiff regulatory demands. Barclays common equity tier one capital climbed 110bp to 11.4% in 2015. HSBC's was up 80bp to 11.9% at the end of last year. RBS had an even more impressive figure, its ratio rising 430bp to 15.5%.
All three have also been working hard to drain the last toxic waste out of their system, a seemingly endless task, especially for RBS. Barclays still has to burn off £50bn of non-core assets before emerging cleansed as Barclays UK. That will be its UK retail, smaller business and wealth management operations, with Barclays Corporate & International, serving larger businesses, the City and Wall Street.
HSBC is also restructuring although it's likely to retain greater diversification, while RBS still has to wade knee-deep through a litigatory swill before it can emerge purified. Somewhere in the mess there's a respectable retail and commercial banking operation struggling to get out, but for RBS, redemption remains some years away, worrying given that banking clean-ups are taking far longer than even the pessimists suspected.
These are just some of the reasons that the share prices have plummeted and continue to plummet. I've previously tried to catch these falling knives and have the scars to prove it. Yet a recovering Barclays at 9.38 times earnings and yielding 4.06%, and HSBC at 9.22 times earnings and yielding 7.89% look difficult to resist. RBS, however, remains highly resistible, especially with any dividend as distant as ever.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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.