Ace City investor Neil Woodford had some interesting things to say about FTSE 100 banking giant HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) during July this year. Woodford, who famously sold out of banks before the financial crisis, was responding to claims by the Daily Mail that he was eyeing up an investment in Lloyds Banking.
Woodford dismissed the claims, saying he was concerned about the risk of future capital raisings, the extent of loan losses still sitting in the bank’s balance sheet and the remote prospect of a dividend in the near future. But he went on to say:
“Some banks have made better progress in clearing up their balance sheets, however, having not participated as fully in the excesses that led to the financial crisis. HSBC, for example, is an investable asset in my opinion. The investment decision here is more a question of valuation and, with a significant exposure to Asia, being comfortable about the risks associated with the slowdown in activity that is now evident in that region, China in particular. The differences, however, between the conservatively managed, well-capitalised HSBC and Lloyds are stark”.
There you have it from the horse’s mouth: HSBC is investable; it’s a matter of valuation and being comfortable with the slowdown of growth in Asia.
HSBC has released its interim results since Woodford’s comments during July. Let’s take a look at the valuation of the company then and now.
| July | Today | |
|---|---|---|
| Share price | 720p | 670p |
| Forecast 12-month P/E | 10.8 | 10.2 |
| Forecast 12-month dividend yield | 4.9% | 5.4% |
| Price-to-book | 1.2 | 1.2 |
As you can see, the shares have fallen 50p (7%), and the price-to-earnings (P/E) ratio and dividend yield are now significantly more attractive than when Woodford was speaking about the company during July. Price-to-book is unchanged due to a modest fall in asset values and a change in the $/£ exchange rate.
I can’t tell you whether Woodford finds HSBC’s current valuation appealing, but he has said recently that he remains “cautious about financial conditions in China and the slowdown that is evident across much of the emerging world”.
So, while Woodford sees HSBC as investable, and valuation has become more attractive, it would seem he’s not yet comfortable about the risks associated with the slowdown in activity in Asia. However, if he sees the outlook there improving — keep an eye on the monthly commentaries for investors in his Invesco Perpetual Income and High Income funds — HSBC appears to be a strong contender for the arch-bear’s return to the long-shunned banking sector.
