Back during 2006, before the financial crisis had begun and when banks were still raking in the cash, the shares of global banking giant, HSBC (LSE: HSBA) hit a high of 1,000p and it seemed as if the bank’s growth was unstoppable.
However, nearly a decade later, HSBC’s shares have failed to return to this multi-year high. The question is, will HSBC’s shares ever return to 1,000p?
Multiple pressures
There’s really one key reason why HSBC’s shares have struggled to move higher over the past five years crisis and that’s a lack of growth. You see, HSBC has been restructuring its operations over the past few years, exiting businesses where the bank is exposed to an increased level of risk — both financial and regulatory.
As HSBC has departed some markets, the bank’s revenue has taken a hit. Over the past five years the HSBC’s revenue has actually fallen, despite the fact that the global economy has grown at a rate of around 3% per annum over the same period.
Nevertheless, it seems as if HSBC hasn’t been chasing growth over this period, favouring higher profit margins instead. In particular, over the past five years, despite lacklustre revenue growth, HSBC’s pre-tax profit margin has jumped from 9%, as reported at the end of 2009, to 29% as reported at the end of 2013.
For the most part, widening profit margins have come as a result of cost cutting. Indeed, since taking the position three years ago, Chief Executive Stuart Gulliver has sold or closed around 60 of HSBC’s businesses, 40,000 jobs have been axed and over $5bn was wiped of HSBC’s operating cost bill during 2013 alone.
But now HSBC is struggling to cut costs, as an ever increasing amount of regulatory and legal paperwork force the bank to hike spending at its compliance and risk management division. Costs are now increasing at this division at a rate of around 25% per annum. Rising costs could put the brakes on HSBC’s earnings growth, which has been powered by cost cutting.
Stable valuation
At first glance HSBC currently looks to be undervalued in comparison to its peers. Specifically, HSBC currently trades at a forward P/E of 11.7, compared to the banks sector average of around 25.
However, when compared to its international peers, HSBC looks to be appropriately valued. Bank of America and Citigroup for example currently trade at forward P/Es of 11.6 and 10 respectively. Both of these international banking behemoths are currently facing the same regulatory pressures as HSBC.
Going to struggle
All in all, it seems as if HSBC’s shares are going to struggle to move higher in the near-term. The bank’s earnings are coming under pressure as costs rise, revenue growth is stagnating and at present, HSBC trades at a valuation similar to that of its international peers.
Still, while HSBC will find it hard to grow in the near-term, the bank should be able to achieve steady growth over the long-term as trade flows between emerging economies grow. For example, HSBC’s management and the bank’s analysts believe that by 2050, the world’s top 30 economies — those in Asia-Pacific, Latin America, the Middle East and Africa — will have grown four-fold.
Four-fold growth in economic output will almost certainly lead to a boost in businesses for HSBC and the bank is better positioned than many of its peers to profit from this growth.
With around 7,400 offices in over 60 countries and territories, HSBC’s global footprint makes it one of the few global banks that can negotiate international trade deals internally, without getting involved with third parties.
