3 banking share ideas operating around the globe

We recently looked at what caused the US banking crisis and what could come next, and shared a roundup of our key takeaways from the biggest UK banks first quarter results.

Here we dive deeper into three banking share ideas with revenue streams from around the globe.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest.

Investing in individual companies isn't right for everyone because if that company fails, you could lose your whole investment. If you can’t afford this, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Bank of America – a US giant

Bank of America is a true behemoth, dwarfing even the largest UK banks with a market cap of over $225bn. But let's address the elephant in the room before we delve further.

US banks have made headlines recently for some stunning crashes. However, in the US there’s a stark difference between the giants like Bank of America and the regional players we’ve seen in trouble. Regulation’s stricter and capital levels are more robust – though not as high as UK-listed banks.

Back to Bank of America, the scale of operations means it has fingers in many pies. But jack of all trades certainly wouldn’t do it justice. It’s got one of the leading retail operations in the US, a leading investment bank and one of the top US broker and adviser firms.

One thing we like about being a leader across various elements of the financial sector is the ability to cross-sell products and offer both consumers and businesses a package of services on a global scale. That increases switching costs for users and helps to bring down customer acquisition costs – both of which are long-term growth drivers. 

That means interest income isn't the only revenue stream, though it's been the main growth driver over recent quarters. We see a more challenging year ahead, as net interest income looks to have peaked, given interest rates are expected to be cut at some point in the next 12 months.

Interest rates in 2023 – where will they go next?

Tech innovation is key for the entire industry, especially with disruptive smaller players looking to grab market share with flashy apps and new features. This is one area we see Bank of America as being relatively insulated. That's down to having one of the largest tech budgets in the industry, and being a trusted name at a time where customers are looking for reassurance.

Digital sales % of total sales

Source: Bank of America quarterly presentation (2018-2023)

Digital progress has been good, and now over half of all sales come from digital channels.

Bank of America looks well placed to benefit from ‘higher for longer’ rates. The digital transformation and an improving picture for the US economy could help reinvigorate fee income from the investment banking and wealth management arms.

The key risk in the short term is if there’s further trouble in the US banking system. We don’t see it spreading to the large players, but it can’t be ruled out. What will impact the large banks is increased deposit insurance payments over the coming years – a short-term hit to profits.

Remember, before you can trade US shares, you need to complete and return a W-8BEN form.

See the latest Bank of America share price and how to trade

Lloyds – a traditional UK lender

Lloyds is a good barometer for the overall health of the UK consumer and its smaller businesses. The bank's first-quarter performance was solid, outperforming analyst expectations. Impairment charges set aside for loan defaults were lower than feared, which is a positive sign.

Lloyds is more exposed to the interest rate cycle than others, as 76% of its total income is interest-related. Net interest margin was steady over the quarter, which was a relatively good result. However, it’s expected to dip over the second quarter as some of the more profitable mortgages issued over the pandemic come up for renewal at less profitable levels.

There’s also increased pressure on banks to offer higher interest on deposits as consumers and businesses shop around for the best rates.

Nevertheless, if management's predictions of a year where margins are greater than 3.05% are correct, it will be positive for income. There’s the potential for more rate hikes this year, which could help offset some of the mortgage headwinds.

One of the things we like about Lloyds is its grip on costs. Last year, its cost:income ratio was the lowest among the large UK-listed banks. That's not an accident either, costs have been a focus for several years now. In an environment where inflation looks like it might be sticky, a market leading position on relative costs is a good place to be.

Financial year 2022 cost:income

Source: Statista (company 2022 annual reports)

The balance sheet's also a strength, paving the way for an ongoing £2bn buyback programme. Management pledged a return of further excess capital over the next two years, and the forward dividend yield of 6.2% is attractive and ahead of the longer-term average. As usual, yields are variable, and no dividend is ever guaranteed.

DIVIDENDS VS SHARE BUYBACKS – WHAT INVESTORS NEED TO KNOW

Aware of its reliance on interest income, there are plans to diversify. But for now, Lloyds remains one of the more sensitive banks to interest rates. Given the environment, we like the name, and the valuation looks undemanding.

However, investors should be aware that a worse-than-expected downturn or a downward shift in interest rate expectations would hit Lloyds harder than others.

See the latest Lloyds share price and how to trade

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Standard Chartered – opportunity to diversify in Asia

Standard Chartered might be a UK-listed bank, but its fortunes are based on economic conditions much further afield. The bank's largest source of income is from Asia, where it has a strong presence in countries like Hong Kong, Singapore, and China. The bank also has a significant presence in Africa, where it’s one of the largest foreign banks.

We like the Asian exposure, growth rates in the region have been the highest among the major global economies, and the reopening of China should act as a near-term tailwind.

Recent first-quarter results were positive. Most of the 13% income growth was down to higher interest rates, which either directly helped income from retail deposits or drove activity for its cash management division.

Net interest margin is expected to settle at around 1.7% over the year. That leaves room to generate a healthy profit, but it's not the only cog for Standard.

Standard Chartered – income split

Source: Asia Investor and Analyst Seminar – Day 1 Presentation

Fee-earning businesses like wealth management, investment banking and financial market trading make up a larger proportion of income than traditional banking. This helps reduce reliance on interest rates and offers diversification when markets are choppy.

More recently, there’s been positive signs that issues with China’s commercial real estate (CRE) are easing. Provisions set aside for bad debt in the first quarter were significantly lower than expected. In fact, some of the previous provisions booked in previous quarters relating to CRE were unwound – albeit a small amount. The more upbeat environment is good to see, but we'd say it's too early to call an end to the trouble.

We like the Asian exposure and see Standard as offering something a little different, especially for investors looking for less reliance on interest rates. The balance sheet is well capitalised, and the valuation's relatively undemanding compared to historical levels.

Though we would caution, relative costs are higher than peers, and the near-term environment is still challenging.

SEE THE LATEST STANDARD CHARTERED SHARE PRICE AND HOW TO TRADE

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Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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