Yes, I know, this headline is asking for trouble. Anybody who has got too worked up about banking stocks in recent years has ended up with egg on their face. The sector has gone from bad to worse (to even worse than you thought it could get) in recent years, with little sign that things will get better.
Good to bad
HSBC Holdings (LSE: HSBA) was supposed to be the good British bank, having avoided a taxpayer bailout during the financial crisis, but recent performance has been just as bad as the rest. Its shares peaked at around 750p three years ago, today you can pick them up at 424p each. That’s a drop of 43%. There’s no sign of any reprieve yet, with the stock down 18% in six months.
The banking sector remains unloved and unrewarding. Worse, HSBC has exposure to another out-of-favour sector: China and emerging markets. What was supposed to be one of its strengths – and may be again one day – has turned into a major weakness. So why am I claiming it looks like a once-in-a-lifetime buy?
Numbers game
To a degree, I’ve just given you my reasons. The very best time to buy stocks is when they’re unloved and unrewarding, and on those measurements, HSBC looks a doozy. Its share price has plunged. So has its valuation, with the stock trading at a relatively cheap 9.41 times earnings. Today’s price-to-book ratio is 0.6 (down from 0.89 one year ago) also suggests the stock may be undervalued.
HSBC currently yields a whopping 8.19%, which is quite a riveting figure. A yield that size can’t last forever, and dividend cover has slipped to 1.3 times, which is a concern. But management has repeatedly made it clear that it will only cut the dividend if we face another crisis. Of course, we may well face another crisis, but the payout looks safe-ish for now. For Q1, HSBC declared an unchanged dividend of 10 cents, twice covered by quarterly earnings of 20 cents.
Get back
Its balance sheet is relatively robust, with a common equity Tier 1 ratio of 11.9% and a leverage ratio of 5%. Adjusted Q1 profits of $5.4bn were down 18% year-on-year, but that was better than forecast. Given these numbers, I don’t expect an instant improvement, especially with earnings per share forecast to fall 8% this year, although they’re expected rebound in 2017 by a healthy 7%. Investors should be looking beyond that date. HSBC has a major restructuring job on its hands, and it remains exposed to a global economic slowdown in general, and Chinese meltdown in particular. But I believe it will get there if you give it time.
Again, that’s my point. If it was flying high, trading at a fully valued 15 times earnings and yielding a decent 4%, it would be a solid investment. But it wouldn’t be a once-in-a-lifetime buy. There are clearly risks, but in the long run I believe HSBC has the strength and global spread to be worth buying at today’s knock-down price.
