Why HSBC Holdings plc Should Surge Despite Severe Asset Shedding

Royston Wild evaluates what HSBC Holdings plc’s (LON: HSBA) divestment programme is likely to mean for future earnings.

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Today I am looking at why I believe HSBC Holdings(LSE: HSBA) (NYSE: HSBC.US) should enjoy strong earnings expansion despite heavy asset shedding.

A terrific long-term growth play

Anyone expecting a flurry of acquisitions from banking goliath HSBC in the near future will be sorely disappointed. The bank has undergone severe restructuring over the past three years in a bid to slash costs and create a more streamlined, earnings-driving machine in a bid to improve returns and to bolster the balance sheet.

HSBC has sold off 63 businesses since 2011, including 20 in the last year alone, and the shedding of non-core units continues to rattle along at a canter. The bank announced plans to sell off its HSBC Bank Kazakhstan subsidiary to Halyk Bank back in February for $176m. The company has also sold off its Jordanian business, as well as its 8% holding in the Bank of Shanghai, in recent months.

These measures helped to drive the firm’s core tier 1 ratio to 13.6% as of the end of last year, up considerably from 12.3% at the corresponding point in 2012.

A great growth play at terrific prices

Despite HSBC’s massive disposal programme, I believe that the firm remains in pole position to hitch a ride onto surging emerging market growth rates. The bank saw pre-tax profit from Hong Kong stride 37% higher during 2013, and from the rest of Asia-Pacific profit surged an incredible 51%.

These territories now account for 70% of group profit, and although many forecasters expect the pace of developing market expansion to slow in hsbcthe medium term, a backdrop of rising personal affluence, population levels and low market penetration for many of HSBC’s products should underpin solid growth over a longer time horizon.

Indeed, HSBC’s pan-global presence should enable it to enjoy stunning returns in the coming decades, and the bank expects that “by 2050 trade and capital flows between Asia, the Middle East and Latin America, in which we are well represented, could increase tenfold.”

Despite the expectation of near-term turbulence, City analysts still expect the firm to follow a 12% earnings improvement in 2014, with a 9% increase expected during the following 12 months.

These figures create P/E multiples of 10.7 and 9.7 for 2014 and 2015, camped around the widely-regarded value standard of 10 times prospective earnings. Meanwhile, price to earnings to growth (PEG) readouts of 0.9 and 1 for these years — bang in line with the bargain benchmark of 1 — underlines the bank’s excellent value in relation to its earnings prospects.

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.

Royston does not own shares in HSBC Holdings.

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