Ever since the financial crisis, investor sentiment towards the banks has swung dramatically. Over the past year, the swing has been in one direction, with banking stocks firmly out of favour. One year ago, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) was riding high at 732p. It has since plunged 15%, to today’s 628p. But now I suspect the pendulum is swinging again. I have been calling the recovery in the HSBC’s share price for the last three months. Now it could be here.
The share price has shown signs of positive life in recent weeks, and I’m watching now to see if this turns into a trend. I don’t expect a dramatic reversal: HSBC’s Q1 results showed just how many headwinds it still has to face. When you’ve just reported a 20% year-on-year drop in profits before tax to $6.79 billion, as HSBC has, you clearly have plenty of challenges. But the 8% drop in Q1 revenues to £15.9 billion always looked worse than it was, because a series of one-off gains made last year’s figures look better.
Core Value
These are tough times for banks, with customers hurting financially, regulators piling on the pain, and competition getting stiffer, especially from local competitors. But HSBC is battling on, mending its core tier 1 ratio, now a healthy 13.6%. The management has also confirmed its intention to stick with investment banking, rather than following Barclays and Royal Bank of Scotland in scuttling from this controversial, but profitable, area.
As a truly global bank, HSBC was hit particularly hard by the emerging market sell-off, but sentiment is improving. Ironically, with Western markets threatening to hit new highs, China and India are starting to look relatively good value. Despite tapering in the US, interest rates on Treasuries remain surprisingly low, keeping a lid on emerging market borrowing costs, and boosting ‘risk’ assets.
Bumpy Ride
The much-heralded Chinese credit and property collapse keeps on refusing to happen. Investors can’t fret about it forever. News the Chinese manufacturing has risen at the fastest pace in five months may also boost sentiment.
HSBC’s recovery will be a bumpy ride. Its reputation as the good bank has since been sullied by its involvement in a series of scandals such as Euribor rigging, plus the embarrassing shareholder revolt over executive pay, notably plans to pay chairman Douglas Flint a bonus in shares of up to £2.25 million. This kind of nonsense has to be sorted.
Recovery Mode
But I like to see a big, sprawling operation clip its wings in the name of cutting costs, and HSBC has been disposing of some of its less profitable parts, selling or closing more than 60 businesses with low sales in the last three years. Growth prospects look steady, with forecast earnings per share of 9% this year and 10% in 2015.
I would rather buy today, while sentiment is largely against HSBC, than wait until the pendulum has started moving backwards. A top bank like this at 12.6 times earnings, against 14.1 times for the FTSE 100 as a whole, still looks an opportunity to good to miss. Especially since it’s 4.9% yield trounces the index average of 3.5%. That should provide some consolation if I’m wrong, and the recovery takes longer than expected.
