Don’t buy HSBC Holdings plc until you’ve seen this!

One of the major appeals of investing in HSBC (LSE: HSBA) is its potential to become increasingly efficient. While many of its sector peers have made major asset disposals in recent years and have cut staff and overall operating costs, HSBC’s expenses have reached a record level. This has made the bank less efficient than many of its rivals and has led to considerable uncertainty about its long-term ability to generate a growing bottom line.

For example, in the current year HSBC’s bottom line is expected to fall by 9% as it attempts to shed thousands of jobs and deliver billions in cost savings. While such moves aren’t expected to have an instant effect, they should help the bank to post improved levels of profitability in the long run. And as soon as next year, HSBC is forecast to deliver a rise in earnings of 8%, which could help to improve investor sentiment in the stock and push the share price higher.

Growth potential

Looking further ahead, HSBC has huge potential to grow its bottom line. A key reason for this is its exposure to the Asian economy, where growth in financial services is set to be exceptionally strong due to the rising incomes of the middle class in China. Not only is wealth set to increase, but with financial product penetration being relatively low, there’s scope for a rising take-up of banking and lending services over the coming years. With HSBC being well-positioned in China and in the wider Asian economy, it looks set to benefit from such an economic tailwind.

Clearly, with any major change to a business comes uncertainty. In HSBC’s case there are doubts as to whether it can deliver the scale of cost savings required in a relatively short space of time. And with the Chinese economy currently growing at a slower rate than many investors had predicted, HSBC isn’t without risk.

However, with the bank trading on a price-to-earnings (P/E) ratio of just 10.5, it seems to have a sufficiently wide margin of safety to merit investment at the present time. And with its valuation being so low, HSBC could be subject to a major upward rerating if it’s able to deliver on its ambitious turnaround plans.

Attractive dividends

Moreover, due to HSBC having a yield of 7.9%, it remains a top-notch income play. Certainly, dividend growth over the next couple of years may be rather pedestrian since the bank may wish to use additional capital to reinvest for future growth. However, with dividends being covered 1.2 times by profit, they seem to be sustainable at their current level and it would be of little surprise for them to rise by more than inflation over the coming years.

So, while HSBC is enduring a tough period where costs have spiralled, now could be a great time to buy a slice of it for the long term.

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Peter Stephens owns shares of HSBC Holdings. 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.