HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) held up well during the banking crisis, largely because most of its business is in Asia and it wasn’t anywhere near as stretched as Western-focused banks. But fears of a Chinese slowdown have hurt the share price of late, and it’s down 18% over the past 12 months to 601p.
But there’s a lot I like about HSBC. Here are three things that I think could make it a Buy:
1. Fundamentally cheap
Earnings per share (EPS) at HSBC have been trending upwards, albeit somewhat erratically on a year-to-year basis. But it’s the direction that counts, and those earnings are being translated nicely into dividends — shareholders enjoyed a yield of 4.3% for 2013.
With EPS forecast to rise by 9.5% per year for this year and next, yields are looking like they’ll be about 5.2% and 5.6% respectively. The payouts should be covered around 1.7 times by earnings too, which looks safe.
For that kind of expected reward, HSBC’s forward P/E of 11.3 for 2014, dropping to 10.4 for 2015, looks too low to me.
2. Capital strength
Banks under the eye of the Prudential Regulation Authority of the Bank of England have minimum capital requirements placed on them now — gone are the days when they could get away with core tier 1 ratios of only around 7% or so.
In HSBC’s full-year report for 2013, it boasted of being “one of the best-capitalised banks in the world“, telling us it had achieved a core tier 1 ratio of 13.6%. That’s just beaten by the 14% reported by Lloyds Banking Group, but it’s ahead of Barclays and Royal Bank of Scotland.
HSBC said it is “well-placed to meet expected future capital requirements“, and it’s hard to disagree.
3. China
Now, China is the risk, but I reckon the risk is overstated and has helped to push the share price down further than it deserves. With the Chinese government trying to shift the country’s economy further towards private enterprise and away from state-led developments, the fear of a slowdown is real enough — and lending and property prices are looking a bit bubbly right now.
But a slowdown in growth is what is needed in the long term anyway, with the latest reported annual rate of 7.5% looking too hot. China is aiming to get it down, and most observers are hoping for a so-called soft landing rather than a hard crash. A catastrophe is possible, but I think it’s looking increasingly unlikely.
