Today’s news that five global banks, including HSBC (LSE: HSBA) (NYSE: HSBC.US) and RBS (LSE: RBS), have been fined by US and UK regulators for apparent wrongdoing regarding the foreign exchange market is perhaps not a great surprise. After all, both banks made provisions for a fine in their most recent results and, as a result, their share prices are down less than 1% today.
Meanwhile, with the investigation continuing into Barclays’ (LSE: BARC) (NYSE: BCS.US) actions (it is not one of the five banks fined today – the others are UBS, JP Morgan Chase and Citibank), its shares are down just 2% in a weak wider market.
Weak Sentiment
Indeed, the decision by the UK’s Financial Conduct Authority and US regulator, the Commodity Futures Trading Commission, to fine five global banks over £2 billion is yet another blow for the UK banking sector. It is just one of a number of investigations that have found apparent wrongdoing at major banks, with PPI claims still ongoing and investigations into various other matters yet to reach their conclusion. So, it’s of little surprise that investors are getting somewhat used to banks being required to pay out vast sums on what feels like a regular basis.
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Profitability
However, such investigations and large fines are unlikely to last in perpetuity. And, despite them, banks such as HSBC, Barclays and RBS are set to report encouraging levels of profitability in the current year. For example, HSBC’s bottom line is due to rise by 3% in the current year and by a further 7% next year, while Barclays is forecast to report growth in net profit of 23% this year and 28% next year. Meanwhile, RBS is set to return to profitability for the first time since the credit crunch began, with pre-tax profits of £4.3 billion pencilled in for the full year.
Valuation
Despite their encouraging overall performance, HSBC, Barclays and RBS are priced to sell. In fact, shares in all three banks appear to offer excellent value for money, with them having relatively low price to earnings (P/E) ratios, for example. HSBC trades on a P/E ratio of just 11.6 (versus 14.1 for the FTSE 100), while Barclays and RBS have even lower P/E ratios of 11.1 and 10.5 respectively. Therefore, there seems to be significant scope for an upward rerating to the shares of all three banks over the medium term.
Looking Ahead
Certainly, more investigations and fines are likely to hit sentiment in the shares of HSBC, Barclays and RBS. However, investors seem to be pricing in further challenges in this regard, with their valuations being hugely appealing at the present time. Therefore, while there could be more lumps and bumps ahead for all three banks, they seem to offer a highly attractive risk/reward profile and, as such, seem to represent compelling investment opportunities.
