James Moore: Does addictionto bonuses make the banks a sell?
Investment View: Standard Chartered is not immune from a favourite pastime of bankers - moaning - or questionable bonuses
With all the banks having reported, now seems like a good time to run the slide rule over the three this column has yet to feature this year. They are HSBC, Standard Chartered and Lloyds Banking Group (I've put a hold on Barclays, and said avoid RBS).
First to Standard Chartered, which often gets forgotten because it does so little business in this country. It's also unlike the other banks for a number of reasons: On most metrics it either met or beat forecasts (the others mostly missed) while turning in its ninth consecutive year of record pre-tax profits (up 11 per cent at $6.8bn, or £4.3bn).
StanChart is in many of the fastest-growing economies, and has reaped the benefits as troubled rivals (such as Citigroup) have been forced to pull back both in terms of winning market share and winning quality people. Actually, the bank used to be a refuge for people who'd worked at Citi and didn't much like its culture (at least before the roof fell in).
It is a shame that it is not immune from another favourite pastime of bankers – moaning – or from questionable bonuses. While you could argue that Standard's health ought to make it immune from the scrutiny faced by other banks, an addiction to bonuses is a questionable policy when it comes to a business's long-term health.
On valuation grounds, StanChart enjoys a chunky premium: it trades at 12.8 times this year's forecast earnings with a prospective yield of only 3.3 per cent. The price to the (forecast) book value of business for 2012 equates to about 1.6 times. However, the results suggest that the premium is deserved. The company is everywhere you'd want it to be and will doubtless outperform again: buy.
HSBC has also been doing unfashionable things like making money and paying dividends. It too is fond of bonuses, but is more open about what it pays than its rivals.
It might seem churlish to complain about a $22bn profit, but HSBC's results were disappointing when compared to expectations. It is also a long way from hitting its own targets for either return on equity or efficiency – in fact costs are rising sharply, not least because HSBC operates in some fast-growing economies where wage costs are on the up. Stuart Gulliver, the chief executive, has promised cuts to deal with this. It remains to be seen how effective these will be. But he has, commendably, been dumping underperforming businesses. HSBC has sometimes seemed like an enormous and unwieldy empire that is addicted to adding territories and businesses regardless of whether they actually make sense on financial grounds. Mr Gulliver seems keen to restore some discipline, which is to be welcomed.
The shares trade at a slight premium (1.2 times) to the net asset value its component businesses are expected to reach in 2012, although they are not hugely pricey based on earnings multiples (just 7 times) with a yield of 5 per cent. On balance, I'd just about continue to hold.
I plan to update how well The Independent's 10 to follow has performed over Easter. However, as I'm looking at banks now, it would seem churlish to ignore Lloyds Banking Group.
First the bad news. There wasn't much to like about its results. Lloyds lost £3.5bn last year. A good chunk of that came as a result of having to set aside £3.2bn to compensate people missold payment protection insurance policies. But even after that, the bank still lost £300m. That is worrying, and it is worth remembering that these results would have looked much, much worse had Lloyds not enjoyed a £2.85bn fall in bad loans.
With unemployment rising, the economy looking shaky, and Europe still in the midst of an awfully big mess, could it be primed for another fall?
Well, at least chief executive Antonio Horta-Osorio is fit. He has even hinted at the possibility of a dividend in 2013, although this should probably be taken with a pinch of salt. It is, however, worth noting that the (commendably) sceptical analyst Ian Gordon believes Lloyds may actually turn in a modest profit for this year, by contrast to Royal Bank of Scotland.
Lloyds was one of the toughest calls among the 10, but it has paid off. When they were published Lloyds shares stood at 25.9p, and the shares are more than a third up on that now. They trade at about 0.6 times 2012 forecast net asset value, cheap. That puts them at a premium to RBS or Barclays.
RBS deserves to trade at that sort of discount, not so Barclays. There is still, I think, some value in the shares, so hold, but I wouldn't criticise anyone who bought Lloyds at the start of the year for cashing in.
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