Why HSBC Plc Might Be Undervalued Today.

HSBC Holdings Plc (HSBC) services its clients in offices in 66 nations globally and is one of the largest banking & financial services organisations in the world. As I write, HSBC is worth HK$ 1.3 Trillion in market capitalisation. Here, I’ll bring you an update on HSBC’s latest financial results, its strategic priorities and valuation figures based on its current stock price. Thus, here are 9 major things that all of us should know before we invest in HSBC.

  1. Net Interest Income
    HSBC’s portfolio of loans and advances to customers has maintained at around US$ 800 – US$ 1,000 Billion for the last 10 years. It has reported a drop in net interest margin (NIM), down from 2.94% in 2009 to 1.66% in 2018. It has caused a fall in net interest income from US$ 40.7 Billion in 2009 to US$ 30.5 Billion in 2018.

Source: HSBC’s Annual Reports

  1. Operating Revenue
    HSBC has reported a fall in operating revenues from US$ 83.5 billion in 2011 to US$ 63.6 billion in 2018. It is because HSBC had recorded a fall in net interest income, net fee & commission income and a drop of net insurance premiums for the last 10 years.

Source: HSBC’s Annual Reports

  1. Associates & Joint Ventures
    HSBC has 19.0% interest in Bank of Communications Co. Ltd and 40.0% interest in the Saudi British Bank. Bank of Communications Co. Ltd was founded in 1908 and is one of the leading financial companies in China, offering services ranging from banking, securities, trust, insurance, and fund management. Whereas, the Saudi British Bank offers a wide range of banking services in Saudi Arabia. HSBC has been generating US$ 2 – 3 billion in additional profits per annum in associates & joint ventures.

Source: HSBC’s Annual Reports

The Saudi British Bank made a merger agreement with Alawwal Bank in 2018. It is subjected to regulatory approval. Upon approval, it dilutes its stake in the Saudi British Bank from 40.0% to 29.2%.

  1. Shareholders’ Earnings
    Shareholders’ earnings have reported a drop in shareholders’ earnings, down from US$ 16.8 billion in 2011 to US$ 12.6 billion in 2018. In 2016, HSBC has recorded US$ 1.3 billion in shareholders’ earnings, the lowest in 10 years. This is because HSBC has recorded lower operating revenue and US$ 3.24 billion in Goodwill Impairment Losses from Global Private Banking in that year. HSBC’s Return on Equity (ROE) fell from 10.58% in 2011 to 6.77% in 2018 as a result of a fall in earnings in that period.

Source: HSBC’s Annual Reports

  1. Balance Sheet Strength
    In Q1 2019, HSBC has recorded Common Equity Tier 1 (CET 1) Ratio of 14.3% and has a liquidity coverage ratio (LCR) of 142.9%. Thus, it has a healthy capital position that enables HSBC to support business growth in the future.

  2. Strategic Priorities
    In June 2018, HSBC has identified eight strategic priorities with each of them having a set of targeted outcomes by year 2020 to deliver growth and improve returns to its shareholders. Their priorities include:

Source: HSBC’s Annual Report 2018

  1. P/E Ratio
    As of 11 June 2019, HSBC is trading at HK$ 65.45 a share. In 2018, it has made HK$ 4.93 in earnings per share (EPS). Thus, its current P/E Ratio is 13.27. It is close to most P/E Ratio recorded for the last 10 years.

  1. P/B Ratio
    In Q1 2019, HSBC has reported US$ 188 billion in shareholders’ equity or equivalent to HK$ 73.81 in net assets a share. Thus, at current stock price, HSBC has a current P/B Ratio of 0.887, which is below its 10-Year P/B Ratio Average of 1.041.

  1. Dividend Yields
    HSBC has paid out consistent growth in dividends per share (DPS) from US$ 0.34 (HK$ 2.635) in 2009 to US$ 0.51 (HK$ 3.993) in 2018, which is not in tandem with its reported shareholders’ earnings over the last 10 years.

Source: HSBC’s Annual Reports

Based on its latest DPS of US$ 0.51 (HK$ 3.993), HSBC’s dividend yield is 6.10% per year, which is above its 10-year average of 4.88% a year.

VIA’s Verdict

Overall, HSBC has not delivered consistent growth in revenues and earnings for the past 10 years. Its growth achieved from franchises in Asia and stable results from the Middle East and North Africa (MENA) regions have been negated by a string of poor results from Europe which is incurring losses and both North and Latin America where their profits are inconsistent.

As a result, HSBC’s stock price has not appreciated for the last 10 years, moving around HK$ 60 – 80 a share for most parts of the 10-year period.

Source: Google Finance

Question: ‘Would you invest in HSBC at HK$ 65.45 a share, considering that the bank is offering 6.10% per annum in dividend yields today?’

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