With a P/E of 7.5 and a 6.8% yield, are HSBC shares a steal?

After rising 89% since September 2021, HSBC shares are currently just off a six-year high. But do they still offer great value?

| More on:
Elevated view over city of London skyline

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA) has been something of a laggard among FTSE 100 bank shares this year. Its 12.3% gain pales in comparison to the monster rises of NatWest (+66.1%) and Barclays (+56.6%).

Yet at 713p, the HSBC share price is still near a six-year high. So shareholders can’t grumble too much.

Double-edged sword

To invest in HSBC, you have to be bullish on Asia (HSBC stands for Hongkong and Shanghai Banking Corporation, after all). The region generates roughly half the bank’s revenue and over half of its profits.

This year, it doubled down even further by selling its Canadian business and buying Citigroup‘s wealth management division in China.

In recent times though, this focus on the world’s fastest-growing region has been a double-edged sword. China’s economy has struggled to return to eye-popping growth after the pandemic, while its property sector has been in crisis mode for what seems like an eternity.

Sluggish Western economies have also impacted those in Asia through reduced demand for exports.

Looking ahead, US-China relations could sour further, giving the bank more geopolitical headaches to contend with. The Chinese economy, which is beset by a rapidly ageing population and high youth unemployment, could be set for underwhelming growth relative to its past. Neither would be great for HSBC.

Peak earnings

In Q3, the bank’s pre-tax profit rose 9.9% year on year to $8.48bn, smashing expectations for $7.6bn. But the record profits that it and other lenders have been reporting don’t look to be sustainable as interest rates come down. So the firm’s earnings have probably peaked.

The good news here is that the market already knows this and the stock is probably valued accordingly. It’s trading on a forward price-to-earnings multiple of 7.5 and a price-to-book ratio of 0.97.

The latter indicates that investors are currently paying slightly less than the book value of the bank’s assets. And that valuation is a discount to large US peers.

Meanwhile, the dividend yield is 6.8%, which is higher than other FTSE 100 bank stocks. Pair this with HSBC’s massive share buybacks (another $3bn just announced), and I reckon the stock is good value. Though at a six-year high, I wouldn’t go so far as to say it’s an absolute steal.

Still bullish on Asian economies

Due to its high yield, I have HSBC in my dividend portfolio. But I also like its focus on Asia. Long term, I still think higher-growth economies like India and China should result in strong earnings for the bank.

Plus, the firm’s increasing focus on wealth management could prove lucrative. There was strong growth in wealth management fees in Q3, and these tend to be less sensitive to interest rate changes.

By 2030, Asia’s middle class is expected to swell to over 1bn people, representing nearly two-thirds of the global middle class. This means there’s a growing pie for HSBC to get its fingers into.

Therefore, I’m happy to have the stock in my portfolio over the long term. If it dips in the months ahead as interest rates are cut, then I’ll top up my holding.

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.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has positions in HSBC Holdings. The Motley Fool UK has recommended Barclays Plc and 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.

More on Investing Articles

Investing Articles

Will the Lloyds share price drop to 50p in 2025 and should I buy the stock if it does?

The Lloyds share price has fallen 12% in six weeks, making the stock cheaper on a price-to-book basis than NatWest.…

Read more »

Investing Articles

As BT’s share price drops 8%, should I buy more?

BT’s share price looks a bargain to me on several key stock measurements, offering a high yield as well, supported…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

After falling 87% in 45 months, could Dr Martens be a winning value stock?

Ahead of its half-year results due to be released later this month, our writer considers whether this FTSE 250 icon…

Read more »

Investing Articles

Forget the FTSE 100! Here are 3 dividend shares to consider for a great passive income

If searching for ways to supercharge a passive income portfolio, these non-Footsie dividend shares are worth a closer look, says…

Read more »

Investing Articles

Up 41% and 17%, these FTSE 250 shares still look like bargains to me!

Looking for the best FTSE 250 shares to buy at rock-bottom prices? Here are two Royston Wild thinks deserve close…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: November’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Young female analyst working at her desk in the office
Investing Articles

Here’s how I’d target a £23k second income with £300 a month

If I was building a shares portfolio today, here's how I'd go about it. With these strategies I stand a…

Read more »

Investing Articles

Tesla stock, MicroStrategy: here’s what Hargreaves Lansdown investors bought last week

MicroStrategy and Tesla stock were among the most popular investments last week as Donald Trump boosted markets with his election…

Read more »