For investors in HSBC (LSE: HSBA), the chances of a 20% return may feel unlikely. That’s because the bank has delivered a gradual decline in its share price during the last three years at a time when a number of its sector peers have posted much stronger levels of performance.
A key reason for its recent challenges is, of course, the prospect of a slowing China. As a key market for the bank, a reduction in Chinese growth is likely to have a negative impact on its earnings, although the world’s second-largest economy continues to have stunning long term potential for financial services companies such as HSBC. Putting this to side, though, HSBC has also allowed its costs to become too high at a time when its rivals have trimmed staff and reduced costs, thereby improving their cost:income ratios.
HSBC, though, is responding to having its highest ever operating costs. It is introducing a number of cost saving methods including a 25,000 reduction in staff numbers and this is set to stimulate its earnings growth over the medium term. With the company’s shares trading on a price to earnings (P/E) ratio of just 10.3, there is plenty of scope for an upward rerating. And, with a yield of 6.2% added to this, a return of 20% seems easily achievable over the medium term.
Similarly, challenger bank Shawbrook (LSE: SHAW) also appears to offer a relatively wide margin of safety. For example, it has a price to earnings growth (PEG) ratio of only 0.4 since it is forecast to increase its bottom line by 38% in the current year and by a further 30% next year.
Clearly, there are concerns among a number of investors regarding the future for challenger banks and the potential for a regulatory clampdown on buy-to-let mortgages. That’s partly because of pressure from first-time buyers regarding house prices, but also because of concerns that as interest rates rise there is a risk that buy-to-let mortgagees will no longer be able to cover their debt servicing costs. This, it is feared, could put pressure on the UK’s economic recovery.
However, with the UK economy continuing to move from strength to strength and a loose monetary policy likely to remain in place during the coming years, demand for new loans from businesses and individuals is likely to remain high. Therefore, buying Shawbrook now seems likely to yield a return of over 20%.
Meanwhile, Bank of Georgia (LSE: BGEO) has today released an upbeat trading statement for the third quarter of the year. In fact, pretax profit increased by 24% versus the same quarter of last year, with the bank stating that it is well-positioned to post upbeat full-year results. That’s despite a volatile economic backdrop as well as a weaker currency.
Looking ahead to next year, Bank of Georgia is expected to increase its net profit by 22% and this puts it on a PEG ratio of just 0.3. As such, an upward rerating is very much on the cards if it can maintain its impressive rate of progress, while a yield of 4.6% should mean that the stock’s total return exceeds 20% over the medium term. Therefore, while lacking the regional diversification of many of its sector peers, it appears to be worth buying at the present time.
