Although the banking sector is heading back to grudging respectability, the valuations of individual banks vary considerably — and some are still depressed.
It’s surprising to see HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) valued on a forward price to earnings (P/E) ratio as low as 11.5 based on forecasts for the year to December 2014, dropping further to 10.5 a year later.
A disappointing year
It’s only a year ago that HSBC was rated by investors as one of our best banks, but over the past 12 months the share price has slipped by 10% to today’s 623p as the FTSE has gained 8%.
The reason seems pretty clear — it’s all about exposure to China.
HSBC remained profitable right through the credit crisis and the recession, and that’s because its focus on Asia has kept it largely immune from the Western property-led liquidity crunch.
HSBA earned a full 70% of its profit from its home market of Hong Kong and the rest of the Asia Pacific region in 2013.
Fear
But now there are credit fears and property worries as the Chinese government aims to move towards more private business and less government-led growth. And a slump would certainly hit HSBC.
But neither the analysts in the City nor the World Bank seem unduly worried about any recession in China any time soon.
In fact, the latter is forecasting 7.4% growth as far ahead as 2016, as China actually tries to slow its growth a little — it’s targeting 7.5% this year as the World Bank predicts 7.6%.
Forecasters seem unmoved by the fears too, and though EPS predictions have been reduced slightly in recent months, the City is still expecting HSBC to grow its earnings and lift its dividends at least as far as 2018.
Optimism
Obviously we can’t rely on such far-ahead figures, but it does show encouraging optimism — and there are still more than twice as many brokers urging us to Buy as to Sell.
At first-quarter report time in May, HSBC was upbeat. Although revenues and profits fell compared to a year previously, chief executive Stuart Gulliver did say that “Whilst revenue was lower than the previous year’s first quarter, which benefited from a number of specific items, we have seen progress in revenue over the trailing quarters. Loan impairment charges fell, reflecting the changes to the portfolio since 2011“.
Good value?
With liquidity strengthened, HSBC looks to be in pretty good shape right now. But should you buy the shares?
Well, that’s only you can decide if you want to be bold when the rest are fearful.