UK bank stocks looking cheap

We are standing in the middle of the big-bank third-quarter earnings season.

Of FTSE 100Its top four names, Barclays And HSBC Already reported, and Lloyds And NatWest It will be done at the end of the week (Thursday and Friday, respectively).

What have we learned so far about how banks work? And about the outlook for the sector and the wider economy?

Strong profit recovery

Both Barclays and HSBC posted impressive, forecast-beating Q3 profits.

Barclays’ pre-tax profit nearly doubled to £ 2bn at £ 1.6bn, contrary to city consensus expectations. This brings its year-to-date profits to 6.9bn – the highest on record in nine months.

Similarly, HSBC’s $ 5.4 billion grew 76% in Q3 and broke the unanimous forecast of $ 3.8 billion. For the year to date, profits continue to be $ 16.2 billion.

The profits of both companies have benefited from the release of hundreds of millions of cash that they set aside for bad debts last year. Loans that have not been implemented.

At the end of the quarter, Barclays had a surplus cash buffer (CET1 ratio) of 15.4% and HSBC’s 15.9%. These ratios are not only above the regulatory minimum, but also comfortable with the bank’s internal targets of 13-14% (Barclays) and 14-14.5% (HSBC).

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At home and away

On the international stage, Barclays ’transatlantic investment banking business has performed strongly, aided by rising fees for consolidation and acquisition activity. Meanwhile, HSBC has assured of potential exposure to bad property loans in its core Chinese market.

But domestically focused Lloyds and NatWest have yet to report, what about Barclays and HSBC UK?

The two banks continue to experience strong UK mortgages and deposit amounts. Barclays has also seen evidence of consumer recovery, seeing a positive trend in consumer spending and payments since the lockdown restrictions were relaxed.

The UK perspective

Barclays has upgraded its economic forecast for the UK’s GDP, saying it expects GDP to reach pre-epidemic levels early next year. HSBC also highlights the strength of the UK’s macroeconomic outlook.

Following the above reversals of the bad debt provisions, Barclays said it expects the hurdle run-rate to remain below historic levels in the coming quarters.

Banks are also fairly relaxed about UK inflation (unless it rises too fast). According to Reuters, Barclays boss Jess Staley told reporters that an increase in annual value of up to 4% could be positive for the bank if supported by economic growth.

Both banks noted that a possible pre-expected increase in Bank of England base rates would be positive for them.

Cautious optimism and confidence

Although the macroeconomic outlook has improved, and Barclays and HSBC believe they have the worst behind them, they acknowledge that the level of uncertainty in the external risk environment is relatively high.

For example, the impact of the unprecedented reduction in financial assistance provided by the government to individuals and businesses is not exactly predictable.

Having said that – and reading the bank’s Q3 results, studying their presentations and listening to their conference calls with analysts – the overriding impression I received from management was one of cautious optimism and confidence.

Furthermore, if actions speak louder than words, Barclays ’current value-added share buyback program of up to £ 500m, and a buyback program of up to bn 2bn announced with HSBC’s Q3 results, screaming‘ confidence ’from the roof.

Bank stock looks cheap

The story of market banking recovery does not seem to have sincerely bought. Barclays’ and HSBC’s share prices have risen slightly, but they – along with other major UK banks – have been rated cheaper on a number of general valuations.

For one thing, their share price is below the value of their net assets. For every £ 1 net asset, buyers of the stock are currently paying less than a quid – in the case of Barclays, p 70p.

For companies with a surplus of cash and a management team hoping to deliver a sustainable annual return on 10% + equity, a share-price discount on the value of net assets seems unusual.

In addition, stocks look cheaper based on ratings less than 10 times the 2022 earnings forecast. And the potential dividend yield in the 4-5% region is not only very healthy, but also able to be supplemented by special dividends and / or more share buybacks.

After that

I will probably return to future events with an in-depth look at the above-mentioned risk environment for banks. And a consideration of the relative merits of individual bank stocks.

Right now, Q3 results from Lloyds and NatWest, presentations and conference calls!

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Graham does not own any of the shares mentioned in this article. The Motley Fool UK is recommended by Barclays, HSBC Holdings and Lloyds Banking Group. Opinions about the companies mentioned in this article may differ from those of the author and therefore our official recommendations for subscription services such as Share Advisor, Hidden Winner and Pro. Here at The Motley Fool we believe that considering the insights of different ranges makes us better investors.

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