From Good To Bad
It has been a bad year for most of the banks, but HSBC (LSE: HSBA) (NYSE: HSBC.US) in particular. Its share price is down 20% over the last 12 months. Over five years, it has returned just 3%, against 52% on the FTSE 100. The so-called ‘good bank’ has been a bad investment.
That is fine by me, I like buying on bad news. And there is plenty of that around. Q1 results were disappointing, with a 20% drop in pre-tax profits to $6.79 billion. Revenues fell 14% to $15.88 billion, well below expectations. Markets, like spoilt children, hate to be disappointed. Not only that, they tend to obsess over what they haven’t been given, rather than what they have. Positive news on costs, impairments and the core tier ratio (now 13.6%) were cast aside like an unwanted toy.
Asian Angst
Once its strength, emerging markets exposure is now HSBC’s weakness. I’ve been concerned about its exposure to the Chinese property bubble for some time, and 22.5% drop in revenues from Asia adds to my alarm. Revenues were also down 15% in Latin America. HSBC is cheap for a reason.
This is a challenging time for all the big banks. The recovery is coming in fits and starts, but the global picture remains patchy, even if we’re feeling more upbeat in the UK. Another worry is that bank profitability is likely to be hit by subdued growth in household borrowing and business lending, according to a new report from the EY ITEM Club.
Both household and business lending is usually more robust at this point in the economic cycle, EY says. Businesses are increasingly turning to other forms of raising capital, including issuing bonds or raiding their fat cash balances to fund growth. Banks have frightened away their customers.
Shareholder Bonuses
Shareholders have got a poor deal out of the banks in recent years. They have carried most of the risk of investing in this volatile sector, while senior staff have pocketed the rewards, in the shape of fat bonuses. Pressure is growing on them to rebalance their priorities, which could help unlock more value for shareholders. Let’s hope that Barclays‘ decision to downscale its private banking operation rather than being held ransom by senior traders marks a sea change.
Clearly, HSBC isn’t exactly risk-free. But much of the danger is in the price. As recently as January, it was trading at 14.2 times earnings. Today, you can buy it at 12 times. Earnings per share (EPS) growth remains promising, with a forecast rise of 11% this year and next. EPS are forecast to grown 26% in 2018 (if such a long-term forecast means anything).
That’s the time horizon you should be looking at if buying HSBC today. In 2018, today’s 595p will surely look like a bargain. If you don’t take advantage, one day you’ll kick yourself.
