It certainly hasn’t been a walk in the park for Asian banks. HSBC (HSBC) and Mitsubishi UFJ (MTU) were among the many banks hit as a result of their exposure to China, and Beijing is now ready to pour a massive $188 billion stimulus into the Chinese economy.
This could be a major game changer for two of the world’s most undervalued stocks. While it’s true that HSBC and MTU were hit hard, their bargain price and high dividend yields put them in a relatively stronger position.
If you were waiting for a green light to jump into those stocks, this just might be it. Here’s why.
HSBC and MTU: Not So Risky
HSBC just may have the most appealing upside in the Asian banking space due to its relatively low comparative risk. While other banks may be mired in the mud with plenty of dubious debt fogging up their balance sheet, HSBC is both more solid and more transparent.
For instance, HSBC is subject to U.S. and U.K. regulators, and thus isn’t influenced by the Chinese government. Moreover, HSBC is known to be much less risk averse than its Chinese counterparts, leaving HSBC with a loan book that is far superior to others, yet still positioned to gain from Chinese stimulus.
While HSBC is highly engaged in China, the stimulus has more of a secondary effect on MTU.
In other words, MTU will be impacted by the ripples that are set to hit Japan, one of China’s largest trading partners, but Japan has a solid banking system and a relatively risk averse business environment.
Moreover, MTU has relatively low leverage, and is exposed to a property market not ensnared in the global real estate frenzy. Although that is drastically different from the dominant environment in Chinese banks, MTU stock still got hit.
Low Prices, High Yields
Both HSBC and MTU provide relatively safe exposure to China, and the recent selloff in their respective shares left both with floor prices and solid yields.
HSBC has a tempting dividend yield of 5.13%, while MTU has a dividend yield of 2.29% (not sky-high, but modest). What’s more, HSBC, one of the biggest lenders in the world, is trading at a price-to-book ratio of 0.8; while MTU, the biggest bank in Japan, is trading at a P/B of 0.7. This means that even if their price recovery took a while, the dividend could provide decent cash income during that time. After all, a healthy dividend is one of the best protections a stock can provide in turbulent times.
And the risks? The fact that the two trade below book value just means that if there is a risk of loss, it’s probably already priced in.
The Bottom Line
Truth to be told, it’s unclear whether this stimulus, alongside the other measures taken by China, will be sufficient to end the crisis.
The Chinese government might be forced to weaken the yuan much further, and Beijing might delay a lot of reforms as well as inject much more into the economy. Clearly, several challenges lay ahead. But with China’s government pulling out the big guns, the crisis will eventually blow over in some way or another.
While it may not be ideal for Chinese stocks, or for China’s currencies, it is certainly a very clear green light to buy stocks that have solid fundamentals like HSBC and MTU. Especially since they already price in a very dark scenario, while having much less risk than their Chinese counterparts.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
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