HSBC (LSE: HSBA) (NYSE: HSBC.US) has been sheltered from the banking crisis to a large extent by its focus on the growing economies of Asia.
Indeed, unlike its UK-focused peers such as RBS and Lloyds, it has managed to deliver a net profit in every year of the credit crunch, although earnings per share (EPS) did fall significantly in 2009.
Furthermore, while many of its peers were forced to make wholesale changes to their business models, in terms of selling vast swathes of ‘non core’ assets, HSBC seems to have emerged from the credit crunch in remarkably similar shape to that in which in entered.
Despite this relative stability, HSBC still seems to offer good value for money. Its shares currently trade on a price-to-earnings (P/E) ratio of 11.6 which, on an absolute basis, seems cheap. However, when this P/E ratio is compared to the wider banking sector and FTSE 100, the good value of HSBC shares is highlighted further, with the banking sector trading on a P/E of 16.3 and the FTSE 100 having a P/E of 13.7.
Therefore, HSBC trades on a discount to the FTSE 100 of 15% and a discount to its peer group of 29%. This makes little sense to me (especially the discount to the banking sector) because HSBC has, as mentioned, been profitable throughout the credit crunch and seems to be in much stronger shape than the likes of RBS and Lloyds that command higher multiples.
Of course, many of its peers have significant potential to quickly increase earnings, which could be a key reason why they trade on such high P/E multiple.
If HSBC were to trade on a narrower discount to its sector, say a discount of 15% rather than the current 29%, it would mean shares trading at around 820p. This is just under 20% higher than the current share price and such gains appear to be achievable over the medium to long term – especially when HSBC’s focus is on faster growing markets and it does not seem to possess the same structural problems as many of its peers.
Furthermore, a yield of 4.6% means that shareholders should be well-compensated while waiting for any potential upside to come through.