HSBC Holdings plc: Plenty For Potential For Profit With Little Risk

HSBC Holdings plc (LON: HSBA) could make you rich.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA) (NYSE: HSBC.US) has fallen out of favour with the market recently. The bank has been sold off by investors who are concerned about falling profits and exposure to the Chinese property market.

However, HSBC has been working to reduce its exposure to the Chinese property market and other risky assets during the past few years. What’s more, declining profits are a result of the bank’s quest for quality over quantity. 

So, after taking these factors into account, it would appear that HSBC’s recent declines could be a great buying opportunity. 

Chinese concerns

HSBC does most of its business in Asia and the bank has reaped that benefits of the region’s growth during the past decade or so. Unfortunately, the recent slowdown in the Chinese property market, has sparked a wave of bankruptcies within the Chinese corporate credit market.

As a result, analysts are becoming increasingly worried about the carry trade, a practice where wealthy individuals borrow money from banks within Hong Kong, to invest within China for a higher rate of interest. It is estimated that this market is worth up to $200bn and a rapid unwinding if markets fell, could lead to a widespread Asian financial crisis.

HSBC will almost certainly be affected by an Asian credit crisis and for this reason alone, many investors have abandoned the bank.

But HSBC’s management has dispelled fears that an Asian credit crisis could spell the end for the bank. Management has stated that while some defaults are likely, the bank’s exposure to bad debt is minimal.

Reducing risk

Indeed, HSBC has significantly reduced its exposure to risky assets and markets during the past few years. Unfortunately, as the bank has retreated from risky areas, sales have declined, although lower profits for less risk seems like a worthwhile trade. 

In particular, HSBC has pulled out of Bahrain, Jordan and Lebanon as high costs and competition saps profitability. Additionally, HSBC has closed some Latin American operations after accusations of money laundering. 

Meanwhile, across the pond, HSBC has shrunk it mortgage loan portfolio, which at one point stood at $118bn but is now worth less than $30bn.

And across the business, the bank has made changes to the way its staff sell products to customers. Staff are now no longer paid on a commission basis but on “balanced scorecard” of performance targets. This has hit profits but customer satisfaction has increased.

Cutting costs

As HSBC de-risks and the bank’s profit comes under pressure, management has started to cut costs, in order to offset falling revenues. For full-year 2014 the bank expects to cut its cost base by $2bn to $3bn. $275m of cost cuts already took place during the first quarter.

As a quick comparison, HSBC’s cumulative dividend payout only cost the company a total of $6.4bn for 2013. So, if the bank reduces costs by up to $3bn per annum, there is scope to increase the dividend payout by around 50%.

This is great news for dividend hunters as HSBC currently has a historic dividend yield of 4.6%. What’s more, City estimates are calling for the bank to offer a yield of 5% and 5.4% for 2014 and 2015 respectively. With HSBC drastically cutting costs, it looks as if this payout is here to stay

City support

Should you buy in? Well, the City has fallen for HSBC’s story and even famed fund manager, Neil Woodford has revealed that he is a fan. Indeed, Woodford believes that the bank is “…well-managed, it has learnt from its mistakes, and it’s cheap…”

Woodford is also attracted to HSBC’s industry-leading Tier one capital ratio of 13.3% and improving balance sheet. Further, HSBC’s rock bottom valuation is hard to pass up as the bank currently trades at a forward P/E of 11.6, similar to the ratio the bank traded at during the midst of the financial crisis. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article. 

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »

artificial intelligence investing algorithms
Investing Articles

Can investors trust the National Grid dividend in 2025?

National Grid surprised investors this year with a dividend cut to help fund upgrades. Is this FTSE 100 stalwart still…

Read more »

Micro-Cap Shares

3 high-risk/high-reward penny stocks to consider buying for 2025

These three penny stocks are risky. But Edward Sheldon believes they have the potential to be excellent long-term investments.

Read more »

Investing Articles

If a 40-year-old put £500 a month in a Stocks & Shares ISA, here’s what they could have by retirement

Late to investing? Don't worry. Here's how a regular long-term investment in a Stocks and Shares ISA could generate huge…

Read more »