We recently compiled a list of the 7 Best European Bank Stocks To Invest In. In this article, we are going to take a look at where HSBC Holdings plc (NYSE:HSBC) stands against the other European bank stocks.

The global banking landscape is undergoing a profound transformation, driven by a confluence of factors including rising interest rates, technological advancements, and shifting regulatory requirements. According to the latest Global Banking Annual Review by McKinsey, the banking sector is witnessing a resurgence in profitability after a prolonged period of historically low interest rates. This period of rejuvenation has been bolstered by a favorable macroeconomic environment, which has helped boost net interest margins and, consequently, overall profits for financial institutions worldwide. However, this recovery comes amidst a backdrop of significant changes and challenges that require banks to adapt and evolve. European banks, in particular, are at the forefront of this transformation. The region’s financial institutions are not only navigating the broader shifts affecting the global banking sector but are also leveraging their unique strengths to adapt to a rapidly changing financial environment. The report “European Private Banking: Resilient Models for Uncertain Times” by Mckinsey sheds light on how European banks are strategically positioning themselves to thrive amid uncertainty. These banks are embracing advanced technologies, such as artificial intelligence and digital payment solutions, to enhance their operational efficiency and service offerings. By integrating these technologies, they are able to meet the evolving demands of customers and stay competitive in an increasingly digital world.

The resilience of European banks is evident in their strategic responses to regulatory and macroeconomic shifts. With regulatory scrutiny intensifying and new players entering the financial landscape, European institutions are adopting diverse strategies to maintain their competitive edge. This includes scaling their digital platforms, improving risk management frameworks, and adapting to changing economic conditions. The ability to balance traditional banking operations with innovative approaches is helping these banks navigate current challenges and position themselves for future growth. The recent increase in interest rates has had a significant impact on the banking sector, particularly in Europe. This rise has led to an improvement in profitability, making European bank stocks an attractive investment opportunity. As banks continue to adapt to the evolving economic environment, they are well-positioned to capitalize on new growth opportunities and deliver strong returns to investors. The strategic advancements being made by European financial institutions, combined with their ability to navigate regulatory and macroeconomic changes, underscore their potential for long-term success.

In a recent conversation at the Twenty-Eighth Annual European Financials Conference in Madrid, Kerstin af Jochnick, a member of the ECB’s Supervisory Board, and Chris Hallam from Goldman Sachs discussed the outlook for the European banking sector. They noted the sector’s increased resilience, attributed to higher capital levels, reduced legacy non-performing assets, and improved internal models. The ECB’s Supervisory Review and Evaluation Process (SREP) highlighted that banks have strong capital and liquidity positions, benefiting from higher profitability. This robustness was confirmed by last year’s stress tests and the ECB Financial Stability Review, which showed euro area banks as resilient despite a challenging macro-financial environment. However, while banks are in a strong position, they face future challenges. Economic slowdowns and high interest rates may lead to asset quality deterioration and affect profitability. Banks are advised to plan for adverse scenarios and manage risks, especially in sectors like consumer credit and commercial real estate, which have shown some vulnerabilities. The ECB emphasizes the need for banks to enhance risk management frameworks and address internal governance deficiencies.

Despite higher profitability, European banks’ valuations remain relatively low compared to international peers. This discrepancy is attributed to cyclical, structural, and regulatory factors, including market concerns about sustained profitability and regulatory levies. The ECB believes that tailored efforts are necessary to improve valuations, including adapting business models, completing the banking union, and addressing regulatory issues. Consolidation within the European banking sector has mainly been domestic, with limited cross-border mergers. The ECB supports increased cross-border mergers to enhance market integration but recognizes that legal and structural barriers, such as differing regulations and a lack of common deposit insurance, hinder progress. Regarding Basel III standards, the ECB stresses their importance for maintaining a robust banking system. The implementation of Basel III is on track to start in January 2025, and the ECB is involved in developing technical standards and guidelines. The ECB also advocates for improved resolution processes for failing banks and broader use of resolution tools to ensure financial stability. Efforts are being made to address vulnerabilities, such as those in the commercial real estate sector, which have shown lower-than-expected impacts on banks so far. Lastly, the ECB emphasizes the need for banks to better incorporate climate-related and environmental risks into their risk management frameworks. While the ECB does not dictate specific green lending policies, it insists that banks must manage these risks as they would any other material risk. For more detailed information, refer to the ECB’s discussions and publications on these topics.

Investing in European bank stocks offers a compelling opportunity for those looking to benefit from the sector’s recovery and transformation. The ongoing evolution of the banking industry, driven by technological innovation, regulatory adaptation, and strategic responses to macroeconomic shifts, presents a promising landscape for investors. As the sector continues to evolve, identifying and investing in leading European bank stocks provides a pathway to potentially substantial returns and long-term growth.

Our Methodology

To compile a list of the best European bank stocks, we first made a list of all European banks and asset managers that trade on the NASDAQ and NYSE stock exchanges. Then, they were ranked by the number of hedge funds that had bought their shares during Q2 2024, and out of these, the top European bank stocks were chosen.

At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

HSBC Holdings plc (NYSE:HSBC)

Number of Hedge Fund Holders: 14

HSBC Holdings plc (NYSE:HSBC) stands at number three on our list of seven best European bank stocks to invest in. HSBC Holdings plc (NYSE:HSBC) recent first-half 2024 results affirm the bank’s strong growth trajectory, particularly in wealth management and corporate banking across key markets like Hong Kong, the UK, and the Greater Bay Area. The bank reported revenue of $37.3 billion, a 1.1% year-over-year increase, and earnings per share grew slightly to $0.88 from $0.86 despite a marginal decline in post-tax profits.

Notably, HSBC Holdings plc (NYSE:HSBC) aggressive share buyback program reduced its outstanding shares, leading to an impressive 17% return on tangible equity. The bank’s strategic focus on expanding its wealth management division has begun to bear fruit, with wealth revenue up 12% over the past two quarters. This segment remains a critical growth driver as HSBC Holdings plc (NYSE:HSBC) attracts new clients and increases assets under management, particularly in Hong Kong, where the bank onboarded 345,000 new customers in just six months.

In the UK, HSBC Holdings plc (NYSE:HSBC) also demonstrated robust performance, with a pre-tax profit of $3.7 billion, an 11% increase year-over-year. The bank’s growing presence in the UK mortgage market, with a market share of 8.1%, reflects its solidified position in this region. Additionally, HSBC’s successful hedging strategies have mitigated potential downsides from anticipated declines in net interest margins (NIM) as interest rates fluctuate.

Valuation metrics underscore HSBC Holdings plc (NYSE:HSBC) attractiveness, trading at a P/E ratio of 7.7 with a dividend yield of 6.86%, positioning it as a compelling value compared to peers like JPMorgan Chase & Co. Management’s commitment to shareholder returns, evidenced by consistent dividend payouts and share buybacks, further strengthens the investment case. With continued growth in key regions, strategic focus on high-margin segments, and disciplined cost management, HSBC Holdings plc (NYSE:HSBC) is well-positioned for sustained long-term growth, making it a strong buy for investors seeking stable returns in the financial sector.

In the second quarter of 2024, there were 14 hedge funds holding positions in HSBC Holdings plc (NYSE:HSBC), as compared to 17 in the previous quarter according to Insider Monkey’s database. The total value of these holdings is approximately $0.06 billion. Ken Griffin’s Citadel Investment Group held the largest stake among these hedge funds during this period.

Overall HSBC ranks 3rd on our list of the best European bank stocks to buy. While we acknowledge the potential for HSBC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HSBC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.