I’ll own up: HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is one of my favourite stocks. But I’m not a starry-eyed optimist who falls in love with my investments — HSBC has earned its place in my portfolio.
If you’re investor with an interest in HSBC, you’ll probably already know about its bargain-basement forecast P/E rating of 11 and its tasty prospective yield of 5.2%, so I won’t bore you with those details.
Instead, I’d like to take a look at three other figures that are part of the HSBC story, and explain why I believe it could provide a 20% upside for new investors.
1. 11.7%
In its most recent trading update, HSBC reported a return on equity of 11.7% — a key measure of profitability for banks, as it measures the profit generated by their net assets.
By way of comparison, Barclays generated a return on equity of 6.4% during the first quarter, while HSBC’s fellow Asian specialist, Standard Chartered, managed 11.2% last year.
Although HSBC’s return on equity is higher than any of its peers, it is below the bank’s target range of 12%-15%. In my view, HSBC’s share price could re-rate strongly if its return on equity reaches this target range.
2. 10.7%
HSBC’s common equity tier one ratio (CET1) was 10.7% at the end of the first quarter.
Although some of its peers have slightly higher ratios, 10.7% is well above both the 7% minimum required by regulators and the 10% ‘comfort’ level that investors expect from big banks.
I’m confident that HSBC could increase its CET1 ratio further, if necessary — its cash balance has risen from $58bn to $172bn since 2008, while it’s continued to pay a dividend, and de-risked its balance sheet.
3. 55.7%
Despite its giant £116bn market capitalisation, HSBC is one of the most efficient UK-listed banks.
HSBC’s most recent reported cost:income ratio was 55.7%, in-line with Standard Chartered’s 54% ratio, and considerably better than Barclays (67%) or Royal Bank of Scotland (66%). Although Lloyds Banking Group manages better at just 50.7%, you would expect this, given its smaller, simpler, UK-centric business model.
20% upside?
Although it’s not a growth stock, I do think that HSBC offers decent upside potential for investors.
If the bank’s share price gradually re-rates to the banking sector average P/E of 13.5, HSBC shares could rise by 20%, to 745p, comfortably below their 52-week high of 772p.
