How Much Lower Can HSBC Holdings plc Go?

HSBC‘s (LSE: HSBA) (NYSE: HSBC.US) shareholders have every right to be concerned within the bank’s performance so far this year.

Year to date, the FTSE 100‘s largest constituent has underperformed the wider index by around 10%. The shares continue to push lower but how much longer can this underperformance continue — how low can HSBC’s shares go?

Valuation appealing

On a valuation basis, HSBC’s shares are already at rock-bottom levels. The bank’s shares currently trade at multiples similar to those displayed during the financial crisis, and as earnings are set to expand at 10% per annum for the next few years, the shares are only going to get cheaper. 

Indeed, HSBC currently trades at a forward P/E of 11.2, compared to the wider banking sector P/E of 19.3. Moreover, HSBC is trading at a 2015 P/E of 10.1 and a 2016 P/E of 9.2. Actually, these low valuation multiples make HSBC one of the FTSE 100’s cheapest constituents, as well as the index’s largest constituent. 

In addition, HSBC’s dividend yield is looking very enticing. The bank is set to yield 5.2% this year, 5.6% during 2015 and then 6.2% during 2016. These payouts look relatively secure, as they are covered around 1.7 times by earnings per share.

Fundamental factors 

Nevertheless, while HSBC’s valuation is appealing, investors are concerned about the bank’s fundamentals. In particular, HSBC is under increasing regulatory pressure around the world, the bank is facing rising taxes here within the UK and over in Asia, HSBC is exposed to a potential credit crunch. 

Specifically, the market is worried about HSBC’s exposure to China where a rising number of corporate defaults have shaken the financial system. Further, Asia is not the economic power house that it once was and the region’s growth is starting to return to more sustainable levels.

As HSBC is heavily exposed to Asia, some investors are worried that HSBC’s sales could start to fall, along with slowing regional growth. 

These troubles are not just limited to HSBC. It would appear as if investors have turned their backs on banks as a group recently. Indeed, as well as HSBC, sector peers Barclays, Lloyds, RBS and Standard Chartered have all underperformed the wider market so far this year. 

Should you buy in?

Despite the above concerns, HSBC remains attractive on a valuation basis. Additionally, City superstar Neil Woodford has revealed that he will be buying HSBC for his new fund, CF Woodford Equity Income.

Woodford’s dislike of banks is well known around the City, he has not brought a single share in any bank since 2003, so his positive view on HSBC is something to take note of.