When I think of banking and financial services company HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) , two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Emerging-market penetration
Although HSBC ‘feels’ like a global monolith, actually, 70% of 2013’s profit before tax came from Hong Kong and the rest of the Asia Pacific region. Of course, HSBC is big all over the world as well, with 54 million customers, 254,000 employees and operations in 75 countries and territories, but that skew in the origins of the firm’s earnings underlines how important emerging markets like China are to the company.
Although headquartered in London now, HSBC started life in Hong Kong in 1865. The firm has a strong pedigree in the region and a long tradition of success. Even today, HSBC is dual listed on the London and Hong Kong stock exchanges. If you’re looking for a experience in one of your emerging-market investments, HSBC Holdings must be worthy of consideration on that point alone.
2) Size
The sheer size of HSBC is mind-boggling and, to investors, comforting. Its £114,246 market capitalisation on the London stock exchange weighs in at more than twice that of its largest rival, Lloyds Banking Group, with its mere £53,271 million capitalisation.
Imagine how much bigger HSBC might yet grow as it rides the economic tide of growth in Asia over the next couple of decades. It’s conceivable that the current 30% of earnings from the rest of the world could remain a small part of the firm’s business or even diminish in the face of burgeoning Asian earnings. In the recent full-year results, underlying earnings are up 41% with all regions showing growth except for Latin America, which is down. Generally speaking, then, economies are bouncing back and HSBC, trimmed for leanness now, looks set to lumber forward, growing steadily through benign economic times.
What now?
HSBC’s forward dividend yield is running at about 5.7% for 2015 and the forward P/E rating is about 10. That looks attractive, but we must consider cyclicality and potential for P/E compression too. Banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.