The last month has been hugely positive for investors in HSBC (LSE: HSBA)(NYSE: HSBC.US), with shares in the bank gaining 7%. This easily beats the FTSE 100‘s flat performance over the same period. However, there could be more gains to come from HSBC — here are five reasons why.
Super Value
Despite recent gains, HSBC still offers top-notch value for money at current price levels. For example, the bank currently trades on a price to earnings (P/E) ratio of just 11.9, which is well below the FTSE 100’s P/E of 13.7. This shows that there is further scope for an upward rating revision and that HSBC’s share price could be pushed upwards through a narrowing of the current valuation gap versus the wider index.
Strong Growth Potential
As well as trading on a relatively low P/E, HSBC offers attractive growth prospects over the next couple of years. For instance, earnings per share (EPS) are forecast to grow by 7% in the current year and by 7% in 2015, which is in line with the wider index. While other banks may be able to offer better growth prospects over the same time period, HSBC remained profitable throughout the credit crunch and so appears to offer a more resilient and reliable earnings stream than its peers.
Income Potential
At the moment HSBC yields 4.8%. While this is attractive, there is scope for this to increase since the bank currently pays out just 57% of profit as a dividend. Peers such as Lloyds are targeting a payout ratio of 65%-70% over the medium term, which highlights the potential for HSBC’s dividend payouts to increase, which would be great news for investors.
Weak Sentiment
The UK banking sector, while improving in terms of profitability, is still very much unloved. Indeed, the recent fine at Standard Chartered and allegations of wrongdoing at Barclays are depressing prices of major UK banks, including HSBC. Therefore, the present time seems to be a good opportunity to ‘go against the herd’ and benefit from prices being temporarily low.
Long-Term Potential
Clearly, the Far East has huge potential when it comes to banking. China, for instance, is transitioning from a capital expenditure-led economy to a consumer-led economy, which will require more credit for businesses and individuals. Banks such as HSBC, which has a strong foothold in the country, could benefit hugely from an increase in demand for their services. This — as well as the great value, income potential, growth prospects and weak sentiment — means that HSBC could prove to be a winning play.