With investors licking their wounds from the latest market sell-off, and preparing themselves for this afternoon’s Budget, it’s easy to forget that it’s business-as-usual for companies releasing news today. Among these was banking giant HSBC (LSE: HSBA).
Having struggled to keep costs under control during the first half of 2018, this morning’s numbers suggest to me that the overhaul of Europe’s biggest bank is finally beginning to bear fruit.
Returning to growth
Reported pre-tax profit hit $5.9bn over the third quarter — an expectation-beating increase of 28% on that achieved in 2017, thanks to “strong revenue growth and lower operating expenses”. Adjusted pre-tax profit — which excluded the impact of foreign exchange fluctuations — came in 16% higher at $6.2bn over the three months to the end of September. Reported loans also increased by $8bn.
Still only eight months into his tenure, CEO John Flint stated that today’s numbers showed that HSBC was “delivering growth from areas of strength, and investing in the business while keeping a strong grip on costs.”
Indeed, growth in all of the company’s businesses brings HSBC’s pre-tax profit for the first nine months of 2018 to $16.6bn — up 12% — even though operating expenses of $25.5bn were recorded, mostly as a result of further investment. Adjusted profit before tax of $18.3bn was 4% higher than last year, and reported revenue rose 5% to $41.1bn, thanks to higher deposit revenue, especially in Asia.
All told, today’s update was encouraging. The question, however, is whether the shares are worth buying in the current economic and political climate?
Income play
Despite UK banks being far more stable than they were as a result of increased regulation, stocks have been weak for a while now, and HSBC is no exception. A year ago, the shares were yours for 737p a pop. Before this morning, they could be purchased for 605p — representing an 18% dip in value over the period.
This downward trajectory left HSBC trading on a price-to-earnings (P/E) ratio of a little under 11 for the current year, before markets opened. While fairly cheap relative to other companies in the FTSE 100, this makes it more expensive to buy than sector peers Lloyds and Barclays (on valuations of 7 and 8 times earnings, respectively). Take into account the low returns on equity that impact on all three, and HSBC doesn’t exactly scream value.
That’s not to say the shares aren’t attractive for other reasons. Despite being dearer, the stock currently yields 6.4% at today’s share price, more than the aforementioned FTSE 100 constituents. Positively, the extent to which these payouts are covered by profits is also beginning to look far healthier than in previous years, even if analysts don’t expect much in the way of dividend growth in 2019.
In addition to being a solid source of income, the significant growth opportunities available around the world (but particularly in China) can’t be dismissed, and give the company excellent diversification in terms of earnings. Being a truly global player is undoubtedly a good thing as the UK crawls towards its official departure from the EU next March.
While not a screaming buy, as a buy-and-hold income stock, I think there are certainly worse options out there than the second biggest company in the UK. Just don’t expect the share price to gallop after today.