Three reasons why HSBC’s share price still looks a huge bargain to me

HSBC’s share price still looks undervalued to me, with the bank’s earnings set to grow, and high passive income on offer as well.

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HSBC’s (LSE: HSBA) share price is still close to its 8 May one-year traded high of £7.24. At such an elevated price, some investors may buy for fear of losing out. Others may avoid the shares for fear that they are already more expensive than they were.

As a former investment bank trader, I know that investment decisions should not be based on either fear or greed.

The only question I ask when a stock is trading high is whether there is any value left in it? In HSBC’s case, I think the answer is ‘yes’ for three key reasons.

Still undervalued

The first reason is that despite the price rise, the shares are still technically undervalued against their peers.

On the key price-to-earnings (P/E) stock valuation measurement, HSBC currently trades at 7.3. This is cheap compared to the 7.7 average of its UK peer group.

It is even cheaper compared to its European peer group average of 7.8.

So, how much of a bargain is it? To ascertain this, I ran a comprehensive discounted cash flow analysis using other analysts’ figures and my own.

This shows HSBC shares to be 52% undervalued right now, even after the recent price rise. Therefore, a fair value would be around £14.35, compared to the current £6.89.

This does not necessarily mean they will reach that price, of course. But it underlines to me what a huge bargain they look.

Still a growing business

Rising earnings and profits drive a company’s share price and rewards to shareholders over time.

The primary risk for HSBC is declining net interest margin (NIM), as interest rates prepare to fall in the UK. The NIM is the difference between the interest a bank receives on loans and the rate it pays for deposits.

However, in its Q1 2024 results released on 30 April, HSBC’s NIM was actually up 0.11% compared to Q4 2023. This was due to continued strong NIMs in its other international banking operations.

Revenue was also up 24% year on year (to $20.8bn), while net income rose 2.5% over the same period (to $10.6bn).

Right now, consensus analysts’ estimates are that revenue will grow at 3.4% a year to end-2026. Return on equity is forecast to be 12.2% by that time.

Therefore, ongoing earnings growth should power its share price and shareholder rewards higher. This is the second reason why I think there is a lot of value left in the shares.

Passive income potential

The third reason is that HSBC has become a big generator of passive income. This is money earned by investors for doing very little work daily, such as dividends.

In 2023, the bank paid 61 cents (48p) a share in total dividends. On the current share price of £6.89, this gives a yield of 7%.

£11,000 — the average savings amount in the UK — invested at 7% would make £770 in annual dividend payouts. If the yield averaged the same over 10 years, the additional return would be £7,700 on top of the £11,000.

However, if these dividends were reinvested back in the stock, the additional return after 10 years would be £11,106 instead of £7,700.

Given these three reasons, I will be adding to my holding in HSBC very shortly.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in HSBC Holdings. 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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