Why HSBC Holdings plc, Standard Chartered plc And Aggreko plc Could Have Further To Fall

HSBC Holdings (LSE: HSBA), Standard Chartered (LSE: STAN) and Aggreko (LSE: AGK) are three underperforming shares with an emerging market focus. Investors have been avoiding these shares as growth is slowing in emerging markets and all three companies face multiple structural and cyclical headwinds in the medium term.

HSBC

HSBC’s main structural problem is its high cost structure. Its cost to income ratio remains stubbornly high, at 58.2% for the first half of 2015, down just 0.4 percentage points from the last year. The bank’s operating costs are so high, as it has capital spread too thinly across too many markets and HSBC faces higher regulatory and compliance costs because of its complexity and scale. The bank’s exit from the Brazilian is certainly a step in the right direction, but much more change is needed.

Slowing economic growth in China would mean HSBC could lose it’s leading engine of profit growth, and the timing of this could not be worse. HSBC is refocusing on Asia, as the bank shrinks its global ambitions and realises a need to keep costs under control.

Despite the cyclical and structural headwinds, analysts are sanguine with the outlook for the bank’s earnings growth. Analysts expect underlying EPS will rise 18% to 52.6 pence in 2015, which gives its shares a forward P/E of 11.2. For 2016, underlying EPS should grow by another 3% to 54.1 pence, and this will mean its forward P/E of earnings in the following year will fall to just 11.0.

However, analysts have been overly optimistic in the past, and recent signs that the slowdown in China is worse than many had expected should mean HSBC could easily disappoint on earnings again. With a pattern of disappointment, investors’ patience may be wearing thin.

Standard Chartered

Recent falls in the prices of many commodities have forced Standard Chartered to massively increase its loan loss provisions. But Standard Chartered has made some progress in cutting its exposure to the commodities market. The bank’s commodities exposure fell 11% in the first half of 2015, to $49 billion.

The bank has so far avoided a rights issue by instead cutting its dividend by 50% and shrinking balance sheet. However, fears over the bank’s capital strength remains, and a rights issue could still be necessary to shore up its balance sheet for the longer term.

Like HSBC, Standard Chartered is also feeling higher compliance costs weigh on its earnings. But Standard Chartered is in worse shape. Operating profits fell 8% in the first half of 2015, which is a serious contrast to HSBC’s operating profits growth of 10% over the same period.

Analysts expect Standard Chartered’s underlying EPS will fall by 28%, to 67.9 pence, which means its shares trade at a forward P/E of 14.3.

Aggreko

In addition to slowing emerging markets, Aggreko is suffering from increasing competition from improved permanent power generation and local competitors in some developing countries. This has lead to pricing pressure in Bangladesh, where it had to accept less favourable renewal terms. Also, slowing oil and gas drilling activity in North America have caused revenues to be much lower than expected.

Analysts expect underlying EPS will fall 7% to 76.9 pence in 2015, before recovering 5% in the following year to 80.6 pence. With earnings growth unlikely to return to the double digit levels seen only two or three years ago, investors have been unwilling to pay a premium on its shares any more. Its forward P/E is currently 14.4 and it has a dividend yield of 2.5%. Although valuations are less demanding, shares in the company could fall further if earnings continue to disappoint.