Pretty bad stuff surrounded HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) in the last couple of days, and contributed to losses in the broader banking sector: the company’s Swiss banking arm helped wealthy clients dodge taxes. It now faces investigation by US authorities and an inquiry by British lawmakers, according to Reuters.
But how bad is it?
And, equally important, do the latest revelations change the investment case? For those familiar with the banking system in the UK and across the pond, the latest news should be easy to swallow. Similarly, it should be easy to suggest that it will soon be business as usual at HSBC, once the dust settles.
If you think I’m insane, read on…
Time To Buy?
The latest events will likely have a limited impact on HSBC’s valuation simply because the shares of most banks already price in such risks. In fact, I believe it may a good time to add 1.5% to 2.5% of HSBC stock to your portfolio (despite not being a big fan of banks at this point in the business cycle).
HSBC is valued at 601p a share. In the last 12 months, it has lost just about 2% of its value; market consensus estimates are for an average price target of 697p, which implies a 16% upside to the end of the year. I think the market may be a tad bullish, but a price target in the region of 665p is conceivable, based on the fair value of HSBC’s assets.
HSBC is by far the most conservative bet in the UK banking industry, and has plenty of tools at its disposal to deliver value, including a projected dividend yield north of 5%. Moreover, at a time when banks need to shrink their assets base, HSBC is well positioned to surprise investors, hefty fines notwithstanding.
Elsewhere In The News
HSBC is not exactly in a sweet spot — it’s a bank, after all, in a sluggish business cycle! — but its assets base offer more upside than that of other troubled banks in the UK.
I don’t think that trading metrics are reliable when it comes to assessing the value of bank stocks at this economic juncture, so I am not going to tell you that HSBC is cheap based on its lowly P/E ratio, but I’d point out that it offers value simply because it has plenty of options both with regard to funding sources and divestments.
In other words, if things go bad, it won’t go under.
While the press focuses on litigation risk, I think other news deserves attention, too. Hang Seng Bank, a subsidiary of HSBC, is divesting up to 5% in China’s Industrial Bank, in a deal that will likely fetch up to £1.3bn, it emerged on Tuesday.
HSBC has managed to cope with volatility in the financial markets for decades, faring better than most other rivals. With a strong focus on Asia, it could certainly reward you with decent returns.
