HSBC (LSE: HSBA) shares have fallen by
1% in 2016. Not a lot, but it brings its
total decline to 23% over the last five
years and it’s hardly a positive when you
consider that the FTSE 100 has risen by
11% during the same time period.
However, HSBC’s share price
performance masks the great opportunity
that currently presents itself to one of the
world’s biggest banks. Certainly, its
operating costs have spiralled and need
to be reined-in, while it needs to become
more efficient, leaner and more profitable.
However, with a strategy to do just that
over the coming years, HSBC is in the
midst of a major change that could spark
a sharp rise in its valuation over the
medium-to-long term.
As well as internal changes, it’s well-
placed to respond positively to external
changes. As a truly global bank, HSBC
offers a degree of geographic diversity
few of its index peers can match. And
with the outlook for the UK and European
economies in particular being decidedly
uncertain, this relative stability and
resilience could prove to be a major ally
over the coming months and years.
Growth opportunities
However, HSBC isn’t so well spread as to
miss out on growth opportunities. It’s
extremely well-positioned in China and
across the emerging world. Therefore, it
has the potential to benefit from the rise
in size and wealth of the middle class in
such places. They’re likely to demand
greater amounts of credit in future as
consumer goods become a more
significant proportion of emerging
economies. This provides opportunities
for HSBC in terms of lending, but also in
other financial products such as savings
and investment.
Such opportunities should allow HSBC to
deliver an improved earnings growth rate
in the long run. However, HSBC is
expected to record a fall in earnings of
15% in the current year, although this is
expected to be change next year with
growth of 6% pencilled-in by the market.
While disappointing, this year’s
expectations leave HSBC’s dividend
covered 1.2 times by profit. This indicates
that although there may be limited scope
for brisk dividend rises over the near
term, HSBC’s dividend appears
sustainable given its current outlook. And
with a yield of 7.5%, there are few blue
chip stocks that can compete in terms of
income return at the present time.
As well as growth potential and a high
income return, HSBC also offers
significant upward rerating potential. It
trades on a price-to-earnings (P/E) ratio
of just 11. Given its long-term outlook,
diverse operations and sound strategy,
such a low valuation is difficult to justify
and it indicates that while being
unpopular among investors, HSBC offers
a wide margin of safety.
As such, further downside may be
somewhat limited, while HSBC’s upside
prospects are very bright. Therefore, it
appears to be one of the best investment
opportunities around right now.
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