HSBC’s (LSE: HSBA) (NYSE: HSBC.US) performance has been less than impressive over the past five years. The company’s shares have fallen slightly more than 10% since the end of 2009.
If you include dividend payments, the bank’s total return is positive but is still lags that of the FTSE 100 over the same period — the FTSE 100 has gained 27% excluding dividends since the end of 2009.
These figures give the impression that HSBC is a poor investment. The question is, will this performance continue and what will it take to push HSBC’s share price higher?
Catalysts
There are several catalysts that could drive HSBC’s share price higher. Firstly, the bank’s valuation. At present levels, HSBC trades at a forward P/E of 11.3, which is significantly below the banks sector average of 25.2. That being said, HSBC’s larger international peers, such as Citigroup and JPMorgan trade at forward P/Es of 10.0 and 10.1 respectively. So, compared to international peers, HSBC looks overvalued.
Nevertheless, City analysts believe that the bank’s pre-tax profit is set to expand at a mid-single-digit rate for the next few years, which is a steady rate of growth worth paying for.
Additionally, over the long term, HSBC is set to benefit from global economic growth. HSBC’s management and the bank’s analysts believe that by 2050, the world’s top 30 economies — those in Asia-Pacific, Latin America, the Middle East and Africa — will have grown four-fold. With around 7,400 offices in over 60 countries and territories, HSBC’s global footprint means that it is better positioned than many of its peers to profit from global economic growth.
Unfortunately, while HSBC does have plenty of opportunities, there are also plenty of factors that threaten the company’s growth.
Threats
The largest threat facing HSBC’s growth is regulation. Fines, capital requirements and compliance costs are all proving to be a drag on HSBC’s growth.
For example, as one of the world’s largest and most systematically important banks, HSBC has been repeatedly targeted by regulators who are seeking to improve the stability of the banking system. This is, on the whole, a good thing. Few want a repeat of the 2008/09 financial crisis. However, the more capital HSBC is forced to retain on its balance sheet, the less capital it is able to deploy and invest.
And even though HSBC’s capital cushion currently stands above regulatory requirements — the group’s core tier 1 ratio stood at 11.2% at the end of the third quarter — there’s now talk that regulators may force banks to hold even more capital. New rules could force banks to set aside capital reserves worth 15-20% of the bank’s assets. A far bigger cushion than is currently required.
As well as increasingly strict capital rules, HSBC continues to be hit by fines for mistakes made by the bank in the past. At the beginning of November, the bank admitted that it could face new fines and costs for its alleged role in banking scandals of more than $1.8bn, or £1.1bn — with more expected to follow. Less than two weeks after this announcement, a Belgian prosecutor accused HSBC of money laundering, France accused the bank of helping clients avoid tax and Argentina made the same accusation.
This tidal wave of fines and lawsuits is terrible news for HSBC. The bank’s compliance costs are now spiralling out of control, undoing years of careful cost cutting.
Operating expenses jumped by 15% during the third quarter and the bank’s pre-tax profit margin fell from 29.9% to 29.2% year on year, which may not seem like much, but this cost the bank around $100m.
The bottom line
Overall, in the long term, HSBC should profit from global economic growth. However, regulatory headwinds are likely to strangle the bank’s near-term growth, which will continue to weigh on the share price.
