It’s been a disappointing 2014 so far for investors in HSBC (LSE: HSBA) (NYSE: HSBC.US), with the far-east-focused bank seeing its share price decline by 4% as the FTSE 100 has risen by 1%.
Indeed, sentiment has been weak across the banking sector during 2014 even though the UK and world economies have continued to gather pace. Despite this, the future could turn out to be a lot more profitable for investors in HSBC. Here’s why.
When you think of super growth stocks, HSBC may not be one of the first names to spring to mind. However, the bank has considerable short and long term growth potential.
Looking at the long term, HSBC’s focus on gaining a foothold in China in recent years could start to pay off, as the economy moves from being capital expenditure-led to being consumer expenditure-led. What this could mean for banks such as HSBC is higher demand for consumer and business loans, as consumer spending becomes a more significant part of the Chinese economy. In turn, more loans mean more fees and interest payments for HSBC.
In the short run, HSBC is forecast to deliver earnings per share (EPS) growth of 8% in the current year and 9% next year. Both of these rates are highly impressive and are well ahead of the FTSE 100’s expected growth rate of mid-single digits. In addition, HSBC has remained profitable throughout the credit crunch so, although its forecast growth rate is behind sector peers such as RBS, its bottom line is starting from a much higher base level.
As with many of its banking peers, shares in HSBC are cheap at the current time. They trade on a price to book ratio of just 0.65 and a price to earnings (P/E) ratio of only 11.8. Therefore, there is vast scope for shares in HSBC to be re-rated upwards and deliver capital gains — and that’s without taking the bank’s strong growth prospects into consideration.
Clearly, banks are likely to remain volatile. That’s not just with regard to their share prices, but also in respect of their profitability as the world economy continues to be a rather uncertain place. However, HSBC offers great value, long term and short term potential, as well as profit stability when compared to many of its peers that demands a far higher price than is currently on offer. As such, HSBC could make a significantly positive impact on your mortgage repayments.
Peter Stephens owns shares of HSBC Holdings. The Motley Fool has no position in any of the shares mentioned.