While it is unclear how high the risk of contagion in the sector will be after the collapse of the SVB, perhaps now is the time for investors to look at European banks. (photo: 123RF)
The events surrounding last week’s Silicon Valley bank collapse, the largest failure since the 2008 financial crisis, show the risks facing the North American banking sector.
During that period, US banks fell 10%, when they were already strained by deposit flight, economic slowdown, recession fears and interest rate hikes discouraging potential borrowers.
With such uncertainty, it is important to examine the case of transatlantic financial institutions. Unlike their US counterparts, European banks continue to experience positive deposit inflows and maintain adequate precautionary liquidity. It is also well capitalized.
While it is unclear how high the risk of contagion in the sector will be after the SVB implosion, perhaps now is the time for investors to look at European banks as a way to diversify their banking involvement and mitigate risks that could generally extend to other US banks.
Here are three examples:
HSBC Bank in London (HSBC) is one of the largest banks in the world with assets of US$3 trillion and 40 million customers worldwide. The banque of free des services commerciaux, institutions et au detail, de banque et marchés mondiaux, de gestion de patrimoine et de banque private in dans 64 pays d’Asie, d’Europe, du Moyen-Orient et d’Afrique du Nord, et d ‘north america.
The United Kingdom and Hong Kong are its largest markets.
A recent report concluded, “We view HSBC’s strong positions in the banking systems of Hong Kong and the UK and its ability to link the two to support global business operations as the primary source of its competitive advantage.” A report issued by the economics and investment research firm Morningstar.
The bank’s large global footprint puts it under higher capital requirements, but diversification also reduces earnings volatility compared to peers, as we saw during the global financial crisis.
“With China, Hong Kong and Singapore major centers of wealth and increasingly important trade corridors, the bank’s decision to shift its focus to Asia, which generates about 75% of its pre-tax earnings, is strategically consistent,” says Johan Equity Analyst at Morningstar Scholtz, who He pegs the fair value of the stock at $49. It currently deals at around $34 USD.
More recently, HSBC exited underperforming markets and underperforming regions as part of its restructuring efforts, so it is now in a better position to generate return on equity that matches or exceeds the cost of capital.
Lloyds (LLOY: LSE / LYG (CAAE): NYSE), also headquartered in London, operates three business segments: Retail Banking (mortgages, credit cards and checking accounts), and Commercial Banking (loans, banking services and working capital management). ) and insurance and wealth management (life and property insurance, pensions).
With 95% of its assets in Britain, Lloyds has transformed itself into a local low-risk commercial bank and retail bank after a major restructuring process that began in 2011. It operates one of the UK’s strongest bank retail outlets.
“The bank has shed £190 billion of current assets and £200 billion of risk-weighted assets, and significantly reduced its reliance on wholesale financing,” says Johan Schultz, who put the fair value of the share at $77. It is currently trading around 47 USD.
Although mortgages make up the bulk of consumer lending (66%), Lloyd’s generated strong net interest margins, driven by its large deposit financing base and as a result of its efforts to focus on margins rather than volumes.
Swiss banking giant UBS (UBS) is the world’s largest wealth manager. It also runs a global bank in Switzerland and a global investment bank.
After navigating a Swiss government bailout and US fines for tax evasion, in 2011, “UBS managed to re-establish its reputation as the world’s largest wealth manager and a private bank for the very wealthy,” according to a report by Morningstar on Equities.
Ultra high net worth clients currently make up approximately 30% of UBS’ assets in Wealth Management operations.
“Ultra-high net worth clients value a strong relationship with their banker, built over many years and often generations,” says Schultz, who pegs the fair value of the stock at $22.80. Today it is trading around 20 USD.
The Swiss bank provides participation in strong long-term growth trends, including the increasing concentration of wealth, the increase in the number of wealthy people in developing economies, and the aging of the population.
“Globally, wealth is increasingly concentrated, and the assets of the wealthy are growing at a much faster rate than GDP,” notes Schultz.
The bank is well positioned to take advantage of growing wealth in emerging markets, where competition is less intense. In addition, the security and diversification offered by a Swiss financial institution makes it an attractive option for investors from more volatile countries.
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