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Education Series: Single-Stock ETPs

Global Banks: An Update

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

The US Federal Reserve have signalled that they will be pursuing a tighter monetary policy, which translates to an increase in interest rates. Retail investors looking to understand the banking sector should take note of this: this usually translates to good news for banking stocks.

Rising rates tend to point to a strengthening economy. This means that borrowers have an easier time making loan payments, which in turn means that banks have fewer non-performing assets. Banks can also earn more from the spread between what they pay (to holders of savings accounts and deposit certificates) and what they can earn (from debt instruments such as U.S. Treasury Bonds).

However, there can be caveats to this since rates aren’t the only determinants to banks’ fortunes. In this follow-up article to our our prior coverage on banking ETPs, we’ll examine the scenario as it stands for the banks underlying some of our ETPs – HSBC (ticker: HSBC), Barclays (ticker: BCS), J.P. Morgan (ticker: JPM), Citi (ticker: C) and Goldman Sachs (ticker: GS).

Financial Sector: Pain Ahead

2021 started with a bang when it came to financial stocks. Large stimulus packages and vaccine availability were considered important reasons for this optimism. In addition, the Federal Reserve signalled two rate hikes in 2023. Since increasing interest rates typically help improve profit margins of banks, this should have been additional factor for upticks in this sector.

Despite all of this, by the end of Q2 2021, the S&P Financial Sector Index (IXM) had a large tumble immediately after a record 11% increase since the start of the year. Historically, there has been a strong correlation between IXM and its parent index the S&P 500 (SPX). This relationship came unglued in 2021.

The reason for this is the fact that banks don’t just derive revenues from interest rates. They also generate a significant amount of their revenue from non-interest bearing activities: brokerage services, banking-related service charges, credit card-related fees, mortgage-related activities, etc. These activities are heavily dependent on economic factors that the market doesn’t consider being very optimistic at the moment.

As of 17th of June, IXM’s performance has dipped below that of the SPX.

European Banks

Readers of the previous article will recall that HSBC was in strategic retreat from Europe while consolidating in Asia. After 18 months of negotiations, HSBC has finalised the sale of its French retail bank to U.S.-based Cerberus Capital Management. Meanwhile, the bank’s Asia-based wealth management business – which is currently under aggressive expansion with 5,000 new wealth planners expected to be hired – is currently worth around $5 billion and is prospectively valued anywhere between $72 billion to $96 billion.

Barclays’ financials has one particularly interesting metric: Barclays PLC’s current insider ownership accounts for 12% of all stocks. Coming at the heels of a stalwart year, the bank’s principal managers are betting very strongly on themselves and their efforts to make this another successful year.

Many investors use the reported Earnings Per Share (EPS) as a proxy for understanding prospective share performance. Doing a side-by-side comparison of the two European banks’ change in EPS vis-à-vis the prior year over the past three years, we see the following picture:

Just going by the EPS growth numbers, it would appear that HSBC has been a little more stable than Barclays. However, it bears noting that big banks have a hybrid business model: no single factor is an absolute indicator of success.

U.S. Banks

J.P. Morgan has been on a lending spree this past year: the bank is the 2nd-largest lender to SoftBank as the Japanese technology conglomerate ramps up its investment plans. The bank has also agreed to purchase UK digital wealth manager Nutmeg in its bid to revamp its wealth management offering in the U.K.

While Citigroup is expected to deliver around $17.79 billion in sales in this current quarter – well in line with analysts’ estimates who are posting a “Buy” recommendation – Citi CEO Mark Mason warns that Q2 will have increased expenses as well as a fall in trading revenue. The former is related to a number of orders received from regulators late last year with regard to its deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls. The latter is primarily tied to its dwindling performance in its fixed-income unit.

Analysts consider Goldman Sachs to be “overweight” (which is a signal for investors to buy more shares of the company) with an average target price of $394.18 per share. However, there has been significant insider selling over the past 3 months and it is estimated that the bank’s debt is not well covered by operating cash flow.

Doing a side-by-side EPS change comparison of the three U.S. rivals over the past three years yields the following picture:

Of the three, the EPS change analysis indicates that – despite the insider selling indicator – Goldman Sachs has had the most robust upside in EPS growth and the most muted downside in EPS declines. This is one reason (out of many other indicators) why analysts seem to be recommending the bank so ardently.

In Conclusion

The most objective indicator of a bank’s performance would be the market-determined share price performance on a daily basis since it incorporates all market participants’ views. Readers will recall in our previous article with YTD data until the end of March, being invested into the dollar-denominated ETPs for Goldman Sachs (GS2) and Barclays (BCS3) proved to be the benchmark-beating alternatives to investing in stocks that also beat the benchmark.

But with new data since then, only Goldman Sachs has shown outperformance, albeit with high volatility, while HSBC has caught up with the benchmark in Q2 2021. All other banks have been underperforming since Q2 2021 began.

However, it bears noting that the somewhat grim prognostications being made about the banking sector – borne out by the bearish performance of the IXM – means that going short on the banks in the event of IXM’s continued downturn might be called for.

References:

  1. HSBC to Soon Announce Divestiture of French Unit to Cerberus, Nasdaq
  2. HSBC Raised to Buy by Citi on Asia Wealth Potential, Bloomberg
  3. Citi’s Shares Drop as CFO Warns of Rising Expenses and Falling Revenue – Report, Yahoo! Finance
  4. JP Morgan to acquire Nutmeg for undisclosed figure, UK Investor Magazine

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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