While 2014 has been somewhat disappointing for investors in HSBC (LSE: HSBA) (NYSE: HSBC.US), with its share price falling by almost 6%, the last few months have been more positive.
Of course, recent results showed that the bank’s operating expenses are now at record levels and it needs to do more to improve efficiencies at a time when top line growth is difficult to come by.
However, shares in the bank have risen by 3% in the last six months and have outperformed the FTSE 100 by 8% during the same period. Furthermore, this strong performance could continue in future months and HSBC could beat the FTSE 100 in 2015. Here’s how.
Weak Sentiment
Despite having a relatively strong six months, sentiment in HSBC remains weak. Key reasons for this include further PPI provisions, provisions for currency probes, as well as a weaker than expected Asian economy. However, none of these problems are set to remain in the long run, with the banking sector as a whole unlikely to continue to be hit in perpetuity with such severe allegations of wrongdoing, for example.
Indeed, the Asian economy still offers huge long term potential for banks such as HSBC. However, the transition to a consumer-focused economy that relies to a greater extent on credit will not happen overnight and will not be a smooth process. Therefore, while temporary, the current issues affecting sentiment could remain for a little while longer and keep investor sentiment in HSBC somewhat pegged back.
Income Potential
Where HSBC could more than make up for its shorter term challenges is with regard to its income potential. Indeed, HSBC remains a superb income play. For example, it currently yields a very enticing 5.1%, but also offers excellent dividend growth prospects due to the bank having a relatively low payout ratio of just 58%.
Certainly, there is scope for the payout ratio to move higher and this is evidenced by next year’s forecast rise in dividends per share of 8.3%. Such a rise puts HSBC on a dividend yield of 5.5% next year, with further increases in its dividend likely to be comfortably ahead of inflation. Such attractive income potential could help to increase demand for shares in HSBC and push them higher during the course of 2015.
Looking Ahead
Of course, HSBC continues to offer superb value for money, and therefore has the potential to see an upward rerating of its current valuation. For example, it currently trades on a price to earnings (P/E) ratio of just 11.5, which is 16% lower than the FTSE 100’s P/E of 13.7. Furthermore, with HSBC’s bottom line due to rise in-line with the wider index, it seems difficult to justify such a low valuation – especially when the aforementioned income potential is taken into account.
So, while its current challenges may well persist into 2015, HSBC’s income prospects and low rating could attract investors to the stock. With shares in the bank having outperformed the FTSE 100 in recent months, this trend could certainly continue into 2015 and beyond.
