Today I am assessing banking giant HSBC Holdings’ (LSE: HSBA) (NYSE: HSBC.US) earnings potential for 2014.
Emerging markets to power earnings higher
A big question hanging over HSBC for this year and beyond is the extent of slowing growth in its key markets of the Asia Pacific, particularly in the regional engine room of China. The bank sources around 70% of total profits from this region, so the macroeconomic backdrop here has huge implications on the bank’s fortunes.
HSBC noted in last month’s update that conditions are starting to improve following signs of slowdown in recent months, and commented that “indications are that economic growth in mainland China is stabilising with positive implications for Hong Kong and the rest of Asia Pacific.” This a promising precursor for strong growth both next year and beyond.
It is true that downside risks remain in these regions, however, a point borne out by the International Monetary Fund in its latest World Economic Outlook report in October. The organisation commented that growth in China and other emerging markets is coming off historical peaks, driven by a combination of reduced potential output growth and a multitude of cyclical factors in China. The body forecasts Chinese GDP expansion of 7.6% for 2013 to drop to 7.3% in 2014.
But as the IMF notes, “growth rates are projected to remain much above those of the advanced economies” in these regions, a scenario which HSBC is well placed to latch onto. Indeed, the bank’s expanding range of products and services should reap the benefit of rising populations and increasing income levels from developing nations over the long-term, as current rebalancing problems begin to subside.
Elsewhere, HSBC also noted that its key US and UK markets are set to continue growing into the new year, even if low by historical standards, while Latin American expansion is expected to remain slow. Still, the firm’s pan-global operations enable it to cotton on to a broad expansion in worldwide growth, and the bank expects GDP expansion of 2% this year to rise to 2.6% in 2014.
City analysts expect earnings to continue thrusting higher next year. Following an anticipated 30% earnings improvement this year, to 58.6p per share, a further 8% is pencilled in for 2014 to 63.3p.
These projections leave the company trading on a P/E rating of 10.6 for next year, almost bang on the bargain benchmark of 10 times forward earnings. This also beats a corresponding reading for a number of its banking peers, including 11.3 for Lloyds Banking Group and 12.3 for fellow emerging market play Banco Santander SA.