Shares in the world’s local bank, HSBC (LSE: HSBA), have underperformed the wider FTSE 100 over the past 12 months. Investor sentiment has turned against the business as the group has struggled to grapple with civil unrest in Hong Kong, HSBC’s most profitable market.
The group generated around 80% of its profits in Hong Kong and mainland China in the third quarter of last year. This also means the bank is highly exposed to the coronavirus outbreak in China.
These factors will almost certainly hold back the group’s growth in the near term. But for investors with a long term perspective, HSBC’s outlook is extremely attractive.
Cost-cutting drive
Towards the end of last year, HSBC announced it’s planning to substantially reduce its global headcount. The group employs around 240,000 people worldwide and management has reportedly been contemplating aggressive job cuts for some time.
The axe is most likely to fall in Europe, where HSBC is struggling to break even. However, in Asia, the group is achieving double-digit returns.
These returns may fall in the short term due to civil unrest and the virus outbreak. Nevertheless, over the next few decades, he bank is almost certain to benefit from China’s continued economic growth and development.
Indeed, the region remains relatively undeveloped from a financial perspective compared to the West. For example, at the end of 2018, the number of credit cards per capita in China was just 0.47. Hong Kong’s penetration rate is around 2.6 cards per person. It sits at a similar level in the United States.
Across the rest of Asia, the opportunity is even more significant. The number of credit cards per capita in Thailand, for example, was just 0.3 at the end of 2019.
This presents an enormous opportunity for HSBC as one of the most recognisable banking brands in China, and one of the world’s largest sector groups.
Tremendous opportunity
As such, now could be an excellent time for investors with a long term perspective to buy shares in HSBC. Looking past its short term headwinds and concentrating on its long term growth potential, the bank certainly looks undervalued at current levels.
Shares in the lender are dealing at a price-to-earnings ratio (P/E) of just 10.7. The long term average is around 13. Meanwhile, the stock is trading at a price-to-book ratio (P/B) of just 0.9 compared to a P/B of one or more for its peers.
These numbers suggest shares in the bank offer a wide margin of safety at current levels. There is also a dividend yield of 6.4% on offer for income seekers.
This level of income insinuates investors will be paid to wait with a share price for recovery. It also implies investors could see a double-digit return on their investment through a combination of income and capital growth over the long run.
