Why HSBC Holdings plc Has Great Growth Prospects

We have three years of growth lined up from HSBC Holdings plc (LON: HSBA).

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HSBCHSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) was rattled by the banking crisis along with the rest of the sector, but it’s fared a good deal better than some, thanks largely to its global diversity.

Profits did suffer, even if the bank did avoid the losses suffered by the bailed-out two. But with the 2013 year just ended, there’s a return to earnings growth expected.

Here’s what’s being forecast:

Dec EPS Change P/E Dividend Change Yield Cover
2013 57.0p +26% 11.2 31.2p 0% 5.0% 1.8x
2014 62.4p +10% 10.2 34.5p +11% 5.5% 1.8x
2015 68.8p +10% 9.3 38.3p +11% 6.1% 1.8x

Back to growth

After a fall of 20% in earnings per share (EPS) in 2012, that return to EPS growth for 2013 is very welcome. And it looks pretty reliable, with reported pre-tax profit at the halfway stage up 10% to $14.1bn — the underlying figure was given as $13.1bn, for a 47% rise.

The bank’s Core tier 1 capital ratio was up too, from 12.3% at the end of 2012 to 12.7%, so liquidity is looking reasonably healthy.

HSBC’s third-quarter update, released in November, reinforced that optimism, with reported pre-tax profit for the quarter up 30% on the same quarter a year previously, to $4.5bn. This time, underlying growth was recorded as 10%, to $5.1bn.

Dividends

Despite the return to earnings growth, dividends look set to stay flat in 2013 — HSBC has already paid three quarterly dividends totaling 18.9p, which is in line with 2012. But a flat 2013 would come after dividends were lifted 10% in 2012 despite that earnings fall, and the predicted 2013 payout would still yield a tasty 5% on today’s share price of 638p.

So why, with earnings rising and dividends predicted to yield better than 6% by 2015, are the shares on a two-year-out price to earnings (P/E) ratio of just a little over 9?

The Elephant

It’s largely down to China.

The bulk of HSBC’s business comes from Asia, with a third of its 2012 profits coming from its home market of Hong Kong — and China is struggling with the twin problems of booming credit and overheating property prices. If that should blow up the way it did in the West, HSBC and others doing business in the region will be hit hard.

But even though the most recent analysts’ updates have cut earnings forecasts back a little, most are expecting a softer landing for the Chinese boom — after all, China does have some stark examples of how not to do it to learn from.

Results due

Those 2013 results should be with us on 24 February, so lets hope for an upbeat outlook to accompany that earnings growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares in HSBC.

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