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Why Payday Lenders Make Me Want To Buy HSBC Holdings plc

I was rather taken aback recently when reading just how much money the payday lending company, Wonga, made last year.

Indeed, it delivered pre-tax profits of £84.5m, an increase of one-third versus the previous year.

The sheer number of people in the UK who turned to it for a short-term loans also surprised me, with one million people doing so in the last year alone.

These figures, of course, attracted criticism from religious leaders, politicians and a wide range of other commentators. However, as far as I can see, Wonga and its peers are merely supplying a service, with the real problem being that there is a demand for such a high-interest loan in the first place.

Such impressive figures got me thinking about lending and just how much money can be made from it. Of course, developed markets seem to be rather maxed-out on credit (outside of payday lending), with many people still paying down debts rather than taking on new ones.

However, the credit bubble we have witnessed over the last 30+ years may just be in its infancy in developing markets, so I’m becoming very interested in HSBC (LSE: HSBA) (NYSE: HBC.US), which has significant exposure to emerging markets in Asia.

My thinking, then, is that a bank with such exposure could be well positioned to benefit from an increased appetite for loans.

Furthermore, I believe the fundamentals stack up for investment in HSBC, with the bank having made a net profit in each of the last five years. This not only highlights the stability of the business, but also that exposure to developing markets has proven to be far more lucrative than being focused on developed ones.

In addition, HSBC offers growth potential, with earnings per share (EPS) forecast to grow by around 30% this year and 7% next year. This, combined with a price-to-earnings (P/E) ratio of 14.2, mean that the price-to-earnings growth (PEG) ratio is less than one; indicating an attractive current price level.

Moreover, should growth rates disappoint slightly, then shareholders can always take comfort from an impressive yield of 4.3%. Although earnings will inevitably fluctuate, HSBC has increased dividends per share in each of the last three years, offering at least a degree of stability to income-seeking investors like me.

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