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RY vs. HSBC: Which Foreign Bank Is Better Ahead of Earnings?

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Key foreign bank earnings that are scheduled for release next week will likely to provide a better understanding of the sector’s near-term prospects. At present, the central short-term concern for foreign banks will be one-time U.S. tax charges, which may adversely affect their full-year profits. However, a lower U.S. corporate tax rate is expected to favor profitability in the long run.

Barring this short-term concern, an uptick in this year’s global economic growth, projected by the World Bank, should infuse further momentum in the foreign banking space, which ended 2017 with a solid recovery after being a laggard for a long time. Particularly, the recovery witnessed by banks in advanced nations, fueled by an accommodative monetary policy and fiscal stimulus of the central banks, could be self-reinforcing in the quarters ahead. (Read More)

In this context, HSBC Holdings plc (HSBC - Free Report) and Royal Bank of Canada (RY - Free Report) which are scheduled to report earnings results on Feb 20 and Feb 23, respectively, assume greater significance.Both the foreign banks a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major stocks reporting earnings from Feb 19 to Feb 23 include Walmart Inc. (WMT - Free Report) and The Home Depot, Inc. (HD - Free Report) .

Price Performance

Royal Bank of Canada has gained 10.1% in the last six months, but underperformed the broader industry that has moved up 10.3% over the same period. In comparison, HSBC has not only outperformed the broader industry but is also ahead of Royal Bank of Canada, gaining 12.2% over the same time frame.

Valuation

Compared with the S&P 500, the industry is clearly undervalued. This implies that the industry has upside potential for the near future.The industry has an average trailing 12-month P/B ratio – the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 1.6, which is below the S&P 500’s average of 3.73. Hence, it might be a good idea not to abstain from stocks belonging to this industry.

Coming to the two stocks under consideration, with a P/B ratio of 1.08 HSBC is undervalued than the S&P 500 and the industry. However, though Royal Bank of Canadais also undervalued compared to the S&P 500, with a P/B ratio of 2.25, it is pricier than both the industry and HSBC.

Dividend Yield

HSBC’s dividend yield over the last year is 3.81%, higher than the broader industry’s figure of 2.6%. With a dividend yield of 3.52%, Royal Bank of Canada shareholders earn a slightly lower dividend yield than HSBC.

Return on Assets (ROA)

Return on assets (ROA) is one of the key financial ratios for banks as they rely heavily on their assets to create revenues. A positive ROA indicates that the company has reported gains from its assets for the period in question. Coming to Royal Bank of Canada and HSBC, ROA for the trailing 12-months (TTM) is 0.95% and 0.32%, respectively. Royal Bank of Canada has a higher ROA than not only HSBC, but also the industry, which has ROA of 0.52%.

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Royal Bank of Canada has delivered positive surprises in three of the prior four quarters with an average earnings surprise of 3.7%. On the contrary, with a negative average earnings surprise of 21.1%, HSBC loses this round to its rival

When considering Earnings ESP, both foreign banks have an ESP value of 0.00%. At the same time, Royal Bank of Canada’s earnings estimate for the current year has increased by 2.7% over the last 60 days, while the same metric for HSBC has remained unchanged. 

Conclusion

Our comparative analysis shows that HSBC holds an edge over Royal Bank of Canada when considering price performance, dividend yield and valuation ratios. However, when considering return on assets, Royal Bank of Canada holds an edge over HSBC.

Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Royal Bank of Canada is clearly the better stock. In this respect, it is evident that Royal Bank of Canada holds a slight edge over HSBC ahead of their earnings releases next week.

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