The HSBC share price has slumped 20% this year, but could it be time to load up?

G A Chester discusses the valuation and prospects of fallen FTSE 100 (INDEXFTSE:UKX) giant HSBC Holdings plc (LON:HSBA) and a banking newcomer with a trading update today.

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The HSBC (LSE: HSBA) share price is down over 20% from its high of earlier this year. Meanwhile, banking newcomer PCF (LSE: PCF) is 13% below its peak — even after a 5.6% rise today, following a trading update. Could now be a great time to buy into these two stocks?

Little and large

In many ways, the two companies couldn’t be more different. HSBC, with a history stretching back to 1865, is a FTSE 100 giant with a market capitalisation of £125bn. PCF, which began life in 1994 as an asset finance house and granted a banking licence as recently as December 2016, is an £80m-cap company listed on London’s junior AIM market. HSBC has a universal banking model and an international network covering 90% of global trade flows. PCF operates in niche segments and all its revenue is currently generated in the UK.

Growth strategy

In today’s trading update for its financial year ended 30 September, PCF reported a 50% increase in its lending portfolio to £219m. Management said it remains confident of growing that portfolio to £350m by fiscal 2020. It reckons it can meet this target through organic growth of existing products in its two divisions: Consumer Finance, which provides finance for motor vehicles to consumers; and Business Finance, which provides finance for vehicles, plant and equipment to SMEs.

The company’s longer-term objective of having a £750m lending portfolio by fiscal 2022 will require acquisitions, strategic partnerships, or the setting up of new specialist teams. Earlier this month, it announced a £5.6m acquisition of a provider of funding and leasing services to the broadcast and media industry. This, and future deals, are intended to diversify its lending niches as well as provide some geographical diversification.

Car crash?

City analysts are forecasting 25% earnings growth when PCF reports its full results, giving a price-to-earnings (P/E) ratio of 20.2, at a share price of 37.5p. For fiscal 2019, forecasts of earnings growth in excess of 60%, bring the P/E down to 12.5.

However, while the valuation appears attractive on paper, I’ve written previously about what I see as a consumer credit bubble in car financing. PCF has substantial exposure to this area — 46% of the loan book at the last count — and exposure is likely to remain significant, even with the company’s plans for diversification. Due to this factor, and my caution on UK-focused lenders generally, I personally see PCF as a stock to avoid.

All-round appeal

I reckon HSBC’s extensive business and geographical diversification makes it a more attractive proposition for investors. This helped the group to be relatively resilient through the financial crisis and the current valuation and prospects look appealing to my eye.

City analysts are forecasting a 40% increase in earnings this year to $0.67 a share (51.5p at current exchange rates) giving a P/E of 12.2 at a share price of 627p. For 2019, the P/E falls to 10.9 on forecasts of a 12% advance in earnings to $0.75 (57.7p). HSBC also offers a generous, if currently static, dividend of $0.51 (39.2p), giving a yield of 6.25%. As such, this is a stock I’d be happy to buy today.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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