Investors in HSBC (LSE: HSBA) (NYSE: HSBC.US) have experienced a highly challenging year, with shares in the emerging market focused bank being down 14% at the time of writing. This compares unfavourably with the FTSE 100, which is up almost 3% over the same time period.
Indeed, the last three months have seen the gap between the two widen, as HSBC has suffered from wider doubts surrounding the sustainability of the emerging market growth story. This, though, could turn out to be a positive for the company — here’s why.
Growth Potential
Although a considerable exposure to the developing world has undoubtedly hurt HSBC in recent months, in the long run it could prove to be a major boost for the company. That’s because countries such as China are gradually moving away from a capital investment-led period of growth towards consumer-led growth. This means that vast capital projects such as building roads, railways and other infrastructure projects may not be the main drivers of economic expansion in future. Instead, consumer purchases looks set to take the lead.
This could be great news for HSBC, as consumers need credit in the form of credit cards, loans and mortgages. Furthermore, as economies develop, businesses may require access to capital in the form of loans from banks such as HSBC. All of which is good news for the banking sector, with there being clear growth potential in the developing world for HSBC and its peers to tap into.
Cost Cutting
While there appears to be potential for HSBC to increase revenue over the medium to long term, management is also focused on reducing costs, too. For instance, since current CEO Stuart Gulliver took over the reins three years ago there have been 40,000 job cuts, 60 businesses have been sold off, with the result being a fall in operating expenses of around $5 billion from 2012 to 2013. This ruthless approach to costs should help to put HSBC on a firm financial footing in which to exploit the growth potential of the developing (and developed) world.
Looking Ahead
Trading on a price to earnings (P/E) ratio of 10.7, HSBC appears to offer good value for money when compared to the FTSE 100’s P/E of 13.2. Furthermore, with significant growth potential on offer in the emerging world and a reduced cost base, HSBC appears to be a top stock that has a lot to offer investors over the medium to long term.