As the earnings season moves forward, many investors may be wondering whether they should add new stocks to their portfolios. In that case, I’d like to suggest three bank stocks that you may want to take a closer look at: JPMorgan (NYSE:JPM), Toronto-Dominon Bank (NYSE:TD) and HSBC Holdings plc (ADR) (NYSE:HSBC).
Each of these bank stocks are backed by fundamentally strong businesses that also have various competitive advantages, such as new client growth potential, cost-cutting opportunities and capital return capacity that support their business and their respective stock prices.
Variables such as interest rates, economic growth, global political and trade worries and activity in the housing markets can, nonetheless, impact a bank’s stock price. Therefore there will likely be daily price swings in JPM, TD or HSBC shares as news headlines change. However, within a quality/reward matrix, all three banks score well and long-term investors may see any further price declines as opportunities to buy into the shares.
With that in mind, let us dive into each bank’s fundamentals to discuss how they may be well-positioned for long-term growth and are set to provide attractive returns to shareholders going forward.
On April 12, JPMorgan, the biggest U.S. bank based on deposits and revenue, delivered robust Q1 2019 earnings results. The results showed a 30-cent beat on earnings-per-share and an impressive $1.5 billion revenue beat. The largest U.S. issuer of credit cards is also a leader in investment banking. The group’s diversified business operates in four segments:
- Consumer and community banking (largest segment by net income);
- Corporate and investment bank;
- Commercial banking; and
- Asset and wealth management (most profitable segment).
JPM’s trailing price-to-earnings ratio of 12X is likely to catch the attention of value investors. Long-term investors also enjoy a current dividend yield of 2.8%. In June 2018, the group announced a new capital return program that includes a share repurchase program for $20.7 billion.
Dividends and stock repurchases concern shareholders because they affect investment returns. In other words, JPMorgan rewards long-term investors with generous cash distributions in terms of dividends and buybacks. JPM is a strong case of management that is able to look after its shareholders through capital distributions over the long term.
In April, the bank announced record profit and revenue for the quarter, helping restore some bullishness for the industry in general, too. This strong profitability, robust market share in its respective operational segments, as well as proactive management, add to the strength of JPM stock, which is up 16% year-to-date.
At the bank’s recent investor day on Feb. 26, JPMorgan Chase said that the bank saw no major recession risk in the U.S. It also announced that its Commercial Banking arm would be continuing to expand internationally in European and Asia-Pacific markets as the bank eyed high-growth opportunities in these markets.
This strategic decision is likely to bring further strength to JPM’s stock price in the next decade. JPMorgan also aims to increase its artificial intelligence (AI) driven execution capabilities in sales and trading, which may help decrease operating costs and improve margins.
Toronto-Dominion Bank (TD)
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group.
On Feb. 28, the Canadian multinational banking and financial services corporation announced its financial results for the first quarter that ended on Jan. 31, 2019. TD Bank reported a 2.4% uptick in Q1 profits to $2.41 billion as its net interest income shot up by 8% to $5.9 billion.
Toronto-Dominion Bank increased its dividend by7 cents to 74 cents per share. The dividend yield now stands at a healthy 4%. The contribution of dividends to TD stock’s total return is quite formidable.
The group has three main business segments:
- Canadian Retail
- U.S. Retail
- Wholesale Banking
The latest quarterly report showed that the U.S. retail operations were strong as the earnings went up 30% from a year earlier. However, net income from the Canadian retail operations slipped. And its wholesale banking showed a net loss of $17 million, which the bank blamed on market volatility and lower client activity.
TD is ranked as one of the top-10 U.S. retail banks and many customers praise the high service the bank offers. Overall, analysts also applaud the robustness of TD’s risk-management and mortgage-underwriting strategies, in part due to the general conservatism of Canadian banks.
Going forward, the group’s wholesale banking is likely to deliver improved performance. Finally, over the next five years, Toronto-Dominion Bank’s EPS is projected to increase by 11.7% annually, compared to an industry average of 9.8%.
In other words, Toronto-Dominion Bank enables shareholders to buy into a strong group that generates profits on both sides of the border. The bank is expected to release its Q2 financial results on May 23, when analysts will pay attention to management’s discussion of the overall business conditions on the earnings call as well as the potential continued strength of the U.S. operations.
Founded in 1865, the London-based bank’s operations are global and HSBC is one of the biggest banks in the world. HSBC’s business is well diversified geographically as it is present in the five continents. The banking giant has four main business segments:
- Retail Banking and Wealth Management (largest segment by revenue)
- Commercial Banking
- Global Banking and Markets
- Global Private Banking
About three-quarters of the profit comes from mostly corporate clients in Asia, offering exposure to Hong Kong and China. HSBC’s trade finance business in the region is still one of its major competitive advantages.
Especially in 2018, the volatility in Chinese stocks due to U.S.-China trade war fears as well as the political reality in Britain have both affected the HSBC stock price adversely. Following a June 2016 referendum, the U.K. decided to leave the European Union (E.U.). The process, known as “Brexit,” has been complicated both in technical and political terms.
Despite its international focus, the group has made substantial preparations for a no-deal Brexit, in which case the U.K. would leave the E.U. without a trade deal. Like many other U.K. banks, in order to continue to have full access to the E.U., HSBC has been moving some of its operations, assets and staff to other countries, mostly France. Therefore, I believe any further negative effect of a potential no-deal scenario is already baked into the stock price.
On Feb. 19, the group released annual results with both revenue and profit coming in below expectations. Management highlighted that concerns about a US-China trade dispute had impacted the banking giant. But stock markets could be ready to look beyond the trade war as both sides express willingness to finalise a new agreement soon. So despite the recent adverse sentiment toward companies with exposure to the Chinese economy, HSBC stock offer investors the possibility to invest in this growing region.
Year-to-date, HSBC stock is up 4%. Value investors are encouraged by the HSBC’s trailing P/E ratio, which is currently at 13.5. Similarly, its price-to-book (P/B) ratio of 0.9, which measures the market value of HSBC’s equity to the book value of its equity, makes the shares attractive. In general, when comparing similar financial stocks, investors like to see lower P/E and P/B ratios.
HSBC management has also initiated a series of cost-cutting measures to improve the bottom line in the coming quarters. As a result, analysts are expecting earnings growth of almost 5% in 2020.
And the bank’s current dividend provides a healthy yield of 5.8%, which makes it an important addition to any capital growth portfolio. For income-oriented investors, the dividend income alone may prove to be a rather attractive proposition. Over the long term, HSBC stock remains a strong financial stock with an excellent dividend ratio and exposure to the high-growth markets of the Pacific Rim.