Is HSBC Holdings plc A Hazardous Value Trap?

Investor sentiment in banking behemoth HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) has wavered significantly during the past three months as the outlook for the Chinese economy has come under severe scrutiny. “The World’s Local Bank” has seen its share price concede 10% since mid-September, dipping to below 600p as a result, and it’s fallen 7% in the past six weeks alone.

A premier pick on paper

Still, many bargain hunters would consider this current weakness to be a fresh buying opportunity.

The City’s band of analysts expect HSBC to follow anticipated earnings growth of 2% in 2014 — results for which are published on Monday 23 February — with expansion of 5% this year. This figure leaves the bank changing hands on a P/E ratio of just 10, bang on the widely-regarded value watermark. And an extra 7% advance in 2016 drives the earnings multiple to just 9.3 times.

And it could be argued that HSBC represents a lucrative purchase for those seeking chunky income flows. Bolstered by an expected earnings uptick and a resolute balance sheet — the bank sailed past the European Banking Authority’s 5.5% capital requirement with a reading of 9.3% back in October — the company is expected to keep its progressive payout policy rolling higher for the foreseeable future.

Indeed, HSBC is predicted to raise the full-year dividend 8% in 2015 to 52.6 US cents per share, resulting in a market-bashing yield of 5.9% And a further 6% hike is chalked in for next year to 56 cents, driving the yield to a sensational 6.2%.

Bank on lucrative long-term returns

As I have mentioned, the effect of the economic slowdown in China — and, consequently, the surrounding region — has understandably cast doubts over HSBC’s growth profile. The company sources around two-thirds of total profit from the Asia Pacific territory, so news this week that Chinese GDP growth in 2014 clocked in at 24-year lows of 7.4% would have done nothing to assuage these concerns.

Still, I believe that the People’s Bank of China’s recent stimulus programme underlines Beijing’s obvious reluctance to allow the domestic economy to fall off a cliff, and it certainly cannot be said that the country lacks the financial resources to kick-start the economy back in the right direction.

And despite this recent cooling, broadly speaking growth rates across Asia continue to rattle along at levels that Western nations can only dream of. Consequently personal income levels continue to drive higher and with it demand for banking products, where financial services penetration remains low.

Given these supportive demographic factors, I expect earnings at HSBC to really surge higher once current cyclical headwinds in these critical geographies abate.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.