The share price of FTSE 100 banking and financial services giant HSBC (LSE: HSBA), has seen an impressive run-up this month, averaging around 5.5% higher than in March. Even with the fairly steep upward climb, however, it is still some distance from the highest value seen in the past year.
This begs the next obvious question: can it continue to pull towards higher levels, and importantly, stay there? The financial services sector can be quite vulnerable to macro-economic fluctuations, and with Brexit in the UK, trade disputes between the US and China, and some softening expected in global growth, there are risks on the horizon. But in analysing the company, I think that it still has a lot going for it and can overcome the impending risks as well. Here’s why.
Strong financials
I liked the company’s robust results in 2018, with a 5% increase in revenues and 16% increase in pre-tax profits. This is despite the fact that the final quarter’s numbers showed a decline in revenues due to economic challenges linked to China and indicates that the rest of the year more than made up for it. In fact, looking at annual results, it has only been strengthening its performance over the years.
Growth markets-focused
A clear focus on the fast growing Asian market has helped in this regard, with the continent accounting for almost half of revenues and much of its profits. The latest annual report noted double-digit revenue growth in the region and outlined further growth acceleration in Asia as one of the firm’s “strategic priorities”. And it sees China’s ambitious ‘belt and road’ infrastructure strategy as a significant potential spur for financing activities in the region.
Reduced Brexit risk
Besides Asian economies, countries in the Middle East, as well as the UK, are among its “scale markets,” or the markets where its share is growing. While the economic outcome for the UK remains unpredictable in the near term, I believe, there is room for optimism here as well. The latest postponement of Brexit gives more time to strike a deal, and who is to say it won’t be a good one? I am also comforted by the International Monetary Fund’s latest World Economic Outlook (WEO) report, according to which, UK growth won’t sharply dip the next two years, even though it says that the outlook is “surrounded by uncertainty”.
Betting on size
HSBC doesn’t just have growth going for it. The firm also has impressive size, the scale of its operations towering over peer companies like Lloyds and Barclays, and I am inclined to bet on a large, profit-making entity’s ability to ride through rough times better than smaller companies do. Despite all this, the price-to-earnings ratio at 13.8x is comparable to that of the other two, which makes it a good buy in my view.
