It?s been a rather disappointing year for investors in HSBC (LSE: HSBA) (NYSE: HSBC.US), with shares in the global diversified bank falling by 3% since the turn of the year. First-half results that were perhaps less than the market was anticipating at the start of the year have done little to persuade investors that HSBC is a ?screaming buy?, too. While today?s third-quarter results offer the same sentiment, HSBC could still be worth buying for the long term. Here?s why.
It’s been a rather disappointing year for investors in HSBC (LSE: HSBA) (NYSE: HSBC.US), with shares in the global diversified bank falling by 3% since the turn of the year. First-half results that were perhaps less than the market was anticipating at the start of the year have done little to persuade investors that HSBC is a ‘screaming buy’, too. While today’s third-quarter results offer the same sentiment, HSBC could still be worth buying for the long term. Here’s why.
On the face of it, HSBC’s third quarter results are disappointing and are a continuation of the challenging first half of the year. For example, underlying profit before tax is down by 12% versus the same quarter last year, with the net movement in ‘significant items’ being a major reason for this. Pre-tax profit increased by 2% to $4.6bn, but analysts were anticipating a figure more in the region of $5.45bn, with the market failing to embrace the bank’s results.
The headline-grabber among the ‘significant items’ is the figure of £237m that has been set aside to cover any potential fines amid investigations by the UK Financial Conduct Authority into possible riggings of the foreign exchange (forex) market.
Elsewhere, a provision relating to PPI claims here in the UK led to HSBC setting aside a further £130 million for compensation claims. This means that, in 2014 thus far, HSBC has set aside £350 million for PPI claims, and there is likely to be more to come over the medium term.
While profit was undoubtedly hit by ‘significant items’, it was also hurt considerably by a 15% increase in operating expenses. Indeed, HSBC was able to grow its top line by 4.6% year-on-year, but margins were squeezed by cost inflation in the markets in which the bank operates. This means that operating expenses are now at their highest ever level and it is, therefore, likely that HSBC will seek to drive further efficiencies from its business model, especially since its cost:efficiency ratio now stands at a rather high 71.2% versus 61.7% in the third quarter of last year.
Of course, weakness in the Chinese and Asian economies has been a major factor in HSBC’s challenging experience during 2014. While this could continue in the short run, HSBC’s longer-term future looks to be a lot more positive. That’s because there remains huge potential for growth in new loans and products in emerging markets, and no other UK listed bank has the exposure or is as well positioned to benefit from this as HSBC is.
As a result, the longer-term future for HSBC looks to be very bright. Certainly, the short term is likely to include more lumps and bumps as the Chinese and other emerging economies continue their transition to developed status. However, with a price to earnings (P/E) ratio of just 11.7 and offering a yield of 5%, HSBC could be well worth buying for longer-term investors.
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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.