Today I am looking at the pros and cons of depositing your funds in banking goliath HSBC Holdings (LSE: HSBA).
Fines to keep on coming?
The banking sector breathed a sigh of relief earlier this month after the Financial Conduct Authority announced plans to set a 2018 deadline for those claiming they had been mis-sold payment protection insurance (or PPI). HSBC alone has had to set aside more than £2.5bn to cover the costs of the scandal, so the news raises hopes that an end to the saga may be in sight.
However, ‘The World’s Local Bank’ faces a multitude of regulatory headaches from elsewhere that threatens massive financial repercussions. HSBC shocked the financial pages in February by admitting its Swiss unit had enabled customers to engage in tax evasion, prompting fresh waves action by already-agitated global regulators. With the firm also being investigated for rigging precious metals markets, HSBC could find itself smacked once again by severe penalties.
Costs steadily sliding
Still, HSBC is working hard to erode its total cost base and set up a more efficient earnings-generating machine, and plans to strip up to $5bn worth of costs from the system by 2017. And the firm’s latest financials underlined the sterling progress being made — costs of around $9.1bn during January-June obliterated broker estimates.
These measures are helping to shore up the firm’s capital position, and HSBC could boast a healthy CET1 ratio of 11.6% as of the close of June, up from 10.9% a year earlier. With the bank also steadily hiving off underperforming assets, I believe HSBC’s expense-slashing initiatives should continue providing huge returns in the years ahead.
Revenues about to hit turbulence?
On top of strong expense-reduction across the business, HSBC is also enjoying solid top-line growth and saw adjusted revenues rise 4% during the first half, to $30.8bn. The bank once again had its strong presence in emerging markets to thank for this, and revenues in Asia galloped 10% higher in the period.
However, the steady slew of disappointing data from regional powerhouse China has caused many to question whether HSBC can keep this stunning sales performance going. The stock sunk to levels not seen for four years in late September, as investors fretted about the health of these hot growth markets thanks to economic rebalancing in China. Further share price turbulence cannot be ruled out as Beijing wrestles to avoid a financial ‘hard landing.’
Brilliant bang for your buck
Still, I believe that the long-term potential of these geographies remains in tact, and that HSBC should reap the benefits of low banking product penetration and rising affluence levels across South-East Asia.
I am not alone in this view, and the City expects the business to chalk up earnings growth of 16% in 2015 alone, with a further 2% rise pencilled in for 2016. Consequently HSBC changes hands on very-attractive P/E multiples of 10.1 times and 10 times for these years, suggesting that any near-term earnings fears over the company’s key markets are more than factored in at current levels.
On top of this, HSBC is also forecast to shell out dividends of 51 US cents per share this year, and 52 cents in 2016. With such projections creating monster yields of 6.2% and 6.4% respectively, I believe value seekers will find the bank hard to overlook at current prices.