Today I am looking at four reasons to be bullish over banking giant HSBC (LSE: HSBA).
Enviable emerging market exposure
Sure, fears over economic cooling in China have been shaking investor confidence for some time now, a phenomenon that continues to hold back momentum across global stock markets. But GDP growth in China and wider South-East Asia is still rattling along at levels we in the West look at in wonderment.
While the UK economy is expected to record expansion of between 2% and 2.5% in 2015, Beijing is anticipated to enjoy growth of around 7%! And once economic rebalancing in China begins to fully take hold, I am convinced HSBC’s sprawling presence across Asia should deliver stunning revenues growth as galloping personal incomes and population levels drive banking product demand skywards.
Costs coming down
And in the meantime HSBC is pulling out all the stops to cut the amount of capital seeping out of the business, a critical near-term factor should a Chinese economic ‘hard landing’ occur. Indeed, the financial colossus saw underlying costs dip to $9.1bn between January and June, and Investec expects underlying costs to drop a further 10% year-on-year during the third quarter, to $8.6bn.
Of course the issue of regulatory fines is likely to remain a headache for a little while longer. HSBC has been hauled over the coals for a variety of wrongdoing in recent years, from the mis-selling of payment protection insurance (or PPI) through to the fixing of foreign exchange markets. Still, in the long-term I believe the eventual run-off of these penalties, allied with solid expense-slashing elsewhere, should turn HSBC into a lean earnings generator.
Capital continues to climb
Indeed, such stringent cost-reduction measures promise to boost HSBC’s capital buffer resoundingly in the years ahead. The effects of these self-help policies — combined with a healthy 4% adjusted income uptick during the first half — helped to power the firm’s core equity tier 1 (CET1) ratio to 11.6% as of the close of June.
This marks a significant upgrade from a ratio of 10.9% just six months earlier, and — following the disposal of its businesses in Brazil — the City expects this figure to spike still higher. The boffins over at Investec, for example, expect the CET1 reading to register at 12.5% by the end of 2017.
Dividends wallop the competition
And HSBC’s healthy capital base is expected to continue delivering brilliant dividend growth for the foreseeable future, creating vast yields that blow most of its industry rivals out of the water.
Indeed, anticipated rewards of 51 US cents per share for 2015 and 52 cents for next year produce jumbo yields of 6.4% and 6.5 respectively. By comparison, High Street rivals Barclays, Lloyds and Santander carry far more modest forward yields of 2.7%, 3.3% and 3.9% correspondingly.