HSBC Holdings (LSE: HSBA) faces some significant headwinds that might crimp profitability, at least in the near term. But this UK banking share is still a FTSE 100 stock I’d be pleased to add to my Stocks and Shares ISA right now. I think it could deliver mighty returns through to the end of the decade.
A lumpy recovery in the global economy threatens the bounce-back of all cyclical UK shares like this. But for HSBC and the banks specifically, the need for central banks to keep interest rates locked around record lows — and to keep quantitative easing measures rolling to aid the recovery — poses an extra risk to the bottom line. Low interest rates squeeze profits as they narrow the rates at which banks lend to borrowers, and the rates that they offer to savers.
I’m also concerned about the prospect of fresh trade wars between major economies. This is particularly problematic for HSBC as recent bickering over tariffs has revolved around the US and China. The Footsie bank sources around two-thirds of total revenues from Asia right now, a region that’s dependent on a strong Chinese economy.
Banking on Asia
However, as a long-term investor, HSBC still appeals to me. I’m particularly encouraged by the fact that analysts today expect China to return to the rampant economic growth of recent decades from 2021.
China and the surrounding areas look so lucrative, in fact, that this particular UK share plans to supercharge investment there. Today it affirmed its intention to “pivot to Asia” and announced a $6bn investment drive on the continent over the next five years. HSBC expects the drive to help deliver “double-digit growth” and to supercharge its wealth management and commercial banking arms specifically.
The FTSE 100 firm’s planned hinge towards Asia is perhaps no surprise. HSBC has endured extremely low returns in the US and Europe in recent times. So it plans to strip down its operations in these developed markets to swivel to its high-growth markets.
There’s always a risk that the UK share’s huge investment in Asia will fail to deliver those much-hoped-for results. But things are looking good right now as the region’s personal income levels soar. KPMG reckons personal financial assets in the region will total $69trn by 2025 as the continent’s middle class grows. This will represent three-quarters of the global total, it estimates.
A top UK value share
City analysts expect HSBC to begin recording explosive earnings growth from 2021. A tough economic recovery in its established markets could blow estimates off course. But right now, forecasts suggest a 57% bottom-line rise in 2021. Another 31% profits increase is predicted for 2022 too.
As a consequence, I think HSBC is one of the tastiest FTSE 100 value shares out there. The bank trades on a forward price-to-earnings growth (PEG) ratio of 0.3. A reading of 1 and below can suggest that a UK share is undervalued. And on top of this. the company boasts big dividend yields of 5% and 5.9% for 2021 and 2022 respectively.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.