HSBC (LSE:HSBA) shares are up 27% over the past year and up 2% over the past six months. Britain’s largest bank has shown remarkable strength in 2022, despite negative economic forecasts in the UK.
In fact, the bank actually looks pretty expensive compared to its peers. HSBC currently has a price-to-earnings P/E ratio of 10.
By comparison, the UK’s second and third largest banks have tanked this year. Lloyds is down 22% over six months (10% over the year) and Barclays is down 31% over six months (12% over the year). The former has a P/E ratio of 5.6, while the latter trades with a P/E of four.
So, why is HSBC so much more expensive than its peers, and is it right for my portfolio?
Asia-focused
HSBC recently announced that it would be accelerating its shift towards Asia. However, the bank is already heavily weighted towards the continent.
In 2021, the bank’s Asia operations accounted for 64.8% of pre-tax profits. Europe only accounted for 20%.
The diversity of its portfolio is largely reflective of its higher valuation.
Last year, the stock’s Asia operations appeared to be holding the share price back amid concerns about the Chinese property market and major developers defaulting on debts.
However, those concerns appear to have passed, despite question marks over the health of the Chinese economy.
Meanwhile, in 2022, negative economic forecasts in the UK, and elsewhere in the West, are weighing on HSBC’s British-focused peers.
Lloyds and Barclays have been unpopular since the Brexit vote, but negative economic forecast have pulled valuations down further this year. As a point of comparison with HSBC, Barclays generates around 66% of its revenue in the UK.
Is HSBC a buy?
Credit Suisse recently said that it was bullish on British banks. It put Lloyds as its top pick, and also gave “outperform” ratings to Barclays and NatWest. However, the brokerage updated its coverage on HSBC to “neutral” and Standard Chartered to “underperform“.
This reinforced my view that there’s better value than HSBC with regards to UK-listed banks. It’s not that I consider HSBC a bad investment, I just think there are better places for my money.
One positive is that HSBC is earning most of its revenue from higher-growth markets than the UK. But it’s equally the case that high-growth markets could suffer more from a global economic slowdown induced by inflation.
There are also concerns about how the bank can continue to manage relations in the UK and China amid increasing geopolitical tension. Chinese insurer Ping An, which owns around 8% of HSBC, wants to split the business in two, separating its Western and Eastern operations to protect it from such challenges.
It’s worth noting that HSBC currently has a 3.6% dividend yield, which is attractive but not world-beating.
In isolation, I think HSBC is a sound investment, but for me, there’s better value among its UK-focused peers. I’ve owned HSBC shares for a while, but at the current valuation, I won’t buy more.
