HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) recently earned itself a remarkable compliment. Top UK fund manager Neil Woodford — whose High Income fund delivered a 1,830% return between 1988 and 2012 — described it as “an investable asset”.
Mr Woodford made the comments in a blog post on the Invesco Perpetual website, in which he said that while “the process of loss recognition” still has several years to run for the UK’s high street banks, HSBC is “conservatively managed [and] well capitalised”.
Given Mr Woodford’s track record, I think his comments on the UK’s banks are worth taking seriously, especially as he was one of the few big fund managers to sell his bank shares ahead of the financial crisis, avoiding huge losses.
Is HSBC attractively valued?
In his comments, Mr Woodford said that deciding whether to invest in HSBC was “a question of valuation”. I’ve taken a closer look at HSBC’s valuation to see how attractive it looks to me.
HSBC currently trades on a historic P/E of 15 and a 2013 forecast P/E of 11.5. The equivalent figures for the FTSE 100 are 17.4 and 14.2, so HSBC looks attractively priced against the wider index.
Last year, HSBC declared dividends of $0.41 per share, and analysts are expecting the total payout to rise to $0.52 this year — which equates to an inflation-beating prospective yield of 4.7%. In comparison, the FTSE 100 offers a prospective yield of just 3.0%, while all of the other FTSE 100 banks offer lower yields or don’t pay dividends.
Asian exposure
In his article, Mr Woodford also mentioned that HSBC’s sizeable exposure to Asia is a potential risk. Last year, 60% of HSBC’s pre-tax profits came from Hong Kong and the Asia-Pacific region, compared to just 21% in Europe.
Clearly, HSBC could be severely affected by a major downturn in China and the wider Asian region — but is this likely?
The latest data suggest that China is on track to hit its 7.5% GDP growth target in 2013, and that after a brief downturn, its giant manufacturing sector is returning to gradual growth.
Some risks remain, but I believe that the long-term story in Asia will be one of steady growth, and I am quite happy to hold shares in HSBC through any short-term dips, in order to access the long-term returns I believe the bank will provide.