Many investors could be forgiven if they have been left feeling disappointed by the performance of HSBC (LSE: HSBA) shares during recent years, as they have featured consistently among the banking sector’s worst performers.
Key to HSBC’s weakness has been a significant expansion in the value of household and corporate debt within emerging markets, which has coincided with a slowdown in the Chinese economy. Given the exposure to emerging markets within HSBC’s loan book, it is perhaps understandable why the market has continued to re-rate the stock during the last 24 months.
This begs the question, why do analysts now appear to hold such a bullish outlook for the shares?
Regulatory capital drives brighter analyst consensus
While HSBC has long held one of the strongest capital buffers among the UK listed banks, it is the after-effects of a robust capital policy that seem to have driven a brightening consensus among the investment banking industry heavyweights.
HSBC’s CET1 capital ratio currently sits just shy of 11%, while in 2017 it is projected to reach 14%. This should provide the group with a sufficient enough buffer to meet any challenges that further China-induced turmoil could potentially throw at it.
Furthermore, with management having suggested that they will take little further action in terms of capital buffers for the current year, it now seems safe to assume that the dividend should at least remain flat with that of the previous year.
As of the end of September, Citi Group, Goldman Sachs, UBS, Investec and Societe Generale had all rated the shares as a buy within the preceding eight weeks, while Berenberg has also reiterated its 750p price target for the stock.
Cheap, Undervalued Or Just Fairly Valued?
While, at 520p each the shares are at multi-year lows, the most striking thing about HSBC at present is the valuation.
This is as the group currently trades at 0.9x net asset value per share, 1x tangible book value and on a forward P/E of 9.8x the consensus for 2015 earnings per share.
In addition, if consensus estimates for total dividends of 33 pence per share are correct, the shares will offer a yield of 6.4% that is covered 1.5x over by EPS.
Summing Up
It is possible that the current slowdown in emerging markets could still prove to be a headwind to earnings during the coming years, which may form a weight around the ankles of the shares.
However, it is also possible that HSBC’s actions on regulatory capital and costs in recent times could still provide it with the ability to improve shareholder returns during the coming years.
At the very least, the likelihood of lower provisions toward regulatory capital buffers in the current year implies a fair chance of HSBC meeting consensus expectations for dividends in 2015 and, with the analyst community now beginning to upgrade estimates for the shares, I can’t help but think that HSBC investors may still have their day yet.
