After a strong performance in 2017, HSBC (LSE: HSBA) shares have underperformed the FTSE 100 in 2018, falling from 767p to 660p today, a decline of nearly 15%. Has the share price fall created an attractive entry point? Let’s look at HSBC’s fundamentals and compare the stock to the other UK banks.
Valuation
For FY2018, City analysts expect it to generate earnings per share of 73 cents. As a result, at the current share price, HSBC is trading on a forward-looking price-to-earnings (P/E) ratio of 12.7. A general rule of thumb is that a ratio under 15 is seen as good value, so looking at that figure in isolation, it appears that the shares are now fairly cheap.
However, to obtain a relative valuation, we should compare HSBC’s P/E ratio to those of the other UK banks. Do the others offer better value? At present, Barclays and RBS trade on forward P/E ratios of approximately 10, while Lloyds Banking Group has a forward P/E of just 8.3. So, on this metric, HSBC actually looks quite expensive relative to the sector.
It’s a similar story with the price-to-book value (P/B) ratio, which measures the market value of the company’s equity to the book value of its equity. Like the P/E, a lower ratio is better. Currently, HSBC has a P/B of 1.11. In contrast, Barclays, Lloyds and RBS have P/B ratios of 0.55, 0.96 and 0.64 respectively. This indicates that HSBC shares are the most expensive of the four.
Dividend yield
Turning to dividends, HSBC is currently forecast to pay its shareholders 52 cents per share for 2018. At today’s share price, that equates to a strong yield of 5.6%. In contrast, looking at analysts’ estimates, Barclays currently offers a prospective yield of 3.1%, Lloyds also offers a yield of 5.6%, while RBS offers a yield of 2.9%. HSBC currently has the equal-highest yield of the four banks, which is a plus, however, we should also consider dividend growth.
Looking at its dividend track record, the FTSE 100 bank has had three consecutive payouts of 51 cents per share now, and said in February that it plans to maintain this level for 2018. That’s not ideal, as this means the bank’s dividends are losing purchasing power to inflation.
Meanwhile Lloyds is growing its dividend strongly at present, having now notched up four consecutive increases and recently hiking its FY2017 payout by 20%. If Lloyds can keep lifting its payout in coming years, it could potentially offer a much higher yield than HSBC in the future. Barclays is forecast to raise its dividend by 112% this year, but that’s coming from a low base, as its dividend was cut significantly in 2016. RBS hasn’t paid a dividend for a decade, but is forecast to resume a payout this year.
Is HSBC a bargain?
HSBC shares certainly look more attractive at today’s price than they did earlier in the year when they were trading near 800p. Today’s P/E ratio of 12.7 and prospective yield of 5.6% look quite reasonable, in my opinion. However, investors should be aware that relative to other FTSE 100 banks, the shares still look slightly expensive.
