A quick look at the HSBC (LSE: HSBA) share price will tell you the stock is undervalued compared to the rest of the market. At the time of writing, the shares are dealing at a forward P/E of 11.5, compared to the market average of 12.6. Also, the stock supports a dividend yield of 6.1%, which is above the FTSE 100 average of around 4.6%.
These numbers seem to suggest HSBC could be an FTSE 100 bargain. But is that really the case? Today, I’m going to try and answer this question.
HSBC might look undervalued at first glance, but compared to the rest of the UK and European banking sector, the shares are appropriately valued.
For example, one of the most common ways to value banks is to look at their price-to-book ratio. On this metric, shares in HSBC are trading at a ratio of 1. The rest of the European banking sector, on the other hand, is dealing at around the same valuation and some banks are trading at a much lower price, such as the Royal Bank of Scotland, which is currently changing hands at a price-to-book ratio of around 0.7.
And HSBC isn’t the only large UK banking stock that offers a dividend yield above the market average. City analysts expect both the Royal Bank of Scotland and Lloyds to yield more than 6% this year, which would make them some of the most attractive income stocks in the whole market.
Finally, HSBC’s P/E multiple might look cheap to the rest of the UK market, but compared to its close peers, the stock doesn’t look that cheap. The rest of the UK banking sector trades at a median P/E multiple of just 7.5.
Worth the price?
All of the above data tell me shares in HSBC are relatively expensive compared to the rest of the UK banking sector. However, as one of the largest banks in the world with substantial exposure to the fast-growing Asian economies, I think the firm deserves to trade at a premium to the majority of its European peers, which don’t have much international exposure.
It’s difficult to say how much of a premium HSBC deserves but, according to my research, shares in the group’s large international peers deal at around 11 to 12 times forward earnings, roughly the same multiple as HSBC currently commands.
So overall, I don’t think the HSBC share price is a bargain at current levels. Other banking stocks are both cheaper and offer an improved level of income.
Nevertheless, if you are looking for international growth and an income stream from a globally diversified banking giant, then there’s no alternative. HSBC is the right company for you. The stock offers a market-beating dividend yield at a fairly undemanding price.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.