I’ve long been a big fan (and a shareholder) of HSBC Holdings (LSE: HSBA) (NYSE: HBC.US), but today I’m wondering whether the UK’s biggest listed bank could be heading for a period of stagnation, and might warrant a ‘hold’ or even a ‘sell’ rating.
My concern is that HSBC is starting to look a little expensive, given that the bank’s recent performance suggests it is struggling to find new business opportunities into which to invest its cash.
A little pricey?
HSBC currently trades on a P/E multiple of 13.3 times its trailing twelve months’ earnings. The bank’s price to book ratio is currently 1.2, and HSBC shares are valued at a substantial 1.4 times its tangible assets.
Considering that HSBC’s size means that rapid growth or expansion is very unlikely, these figures all suggest to me that HSBC’s shares are fully valued at the moment. HSBC has underperformed the FTSE 100 so far this year, rising by just 6%, compared to 10% for the index, and I suspect that this stagnation could continue for a little while longer.
All that cash…
There’s no doubt that HSBC’s balance sheet remains one of the strongest in the business. At the last count, the bank had cash equivalents of $156bn, up from just $31bn in 2007.
The problem is that I’m not sure that HSBC is able to find a profitable way of using this money. During the first half of this year, HSBC’s operating income fell by 7%, new loans and advances to customers were down by 3%, and customer accounts were down by 2%.
Although HSBC’s bad debt charges and operating costs fell during the first half, which is good, increasing profits through cost cutting always has a limit, and, on its own, isn’t enough to generate long-term growth — underlying growth in activity is also required.
What are the alternatives?
HSBC’s much smaller, Asia-focused peer, Standard Chartered, currently has a 2013 forecast P/E of 10.5, versus 11.4 for HSBC. Although Standard Chartered’s 3.8% prospective yield is lower than the 4.7% offered by HSBC, I think that Standard Chartered’s growth prospects may be superior to those of HSBC.
During the first half of this year, Standard Chartered delivered growth in all the areas where HSBC saw a decline — operating income was up 4% and customer advances were up 3%, which should help drive further earnings growth over the next few years.