HSBC’s share price shows it could be the best banking stock around

The share price of HSBC Holdings plc (LON: HSBA) could be primed for lift-off thanks to bumper dividends, strong profit improvement and long-term growth potential in Asia.

| 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.

After a rocky few years, things are finally looking up for global mega bank HSBC (LSE: HSBA). The company is once again profitable on a statutory level, it has exited several non-core markets to focus on its profitable Asian base and its shareholders are already receiving huge dividend payments.

Healthy at last 

And these characteristics together with the company’s current share price make me think it’s one of the best banking stocks on offer for UK investors. This is because at exactly 1 times book value, its share price bakes in little to no growth, which I think is a mistake.

In fact in 2017, the bank’s adjusted revenue rose 5% to $51.5bn as each of its three main business lines performed well during the year. Even more impressive was the group’s bottom line performance as cutting costs, exiting underperforming markets and rising interest rates helped boost adjusted pre-tax profits by 11% to $21bn.

Increased profits kept the bank’s year-end tier 1 capital ratio at 14.5%, well above regulatory minimums and enough to once again pay out $10.2bn in dividends of $0.51 per share. At its current share price, this means shareholders enjoy a 5.65% yield from their quarterly dividend cheques. On top of this, management used its healthy balance sheet to buy back $3bn of its own shares with further buybacks likely on tap.

Investing in future growth  

Looking ahead, I see good reason for these shareholder returns to grow as management cuts costs assiduously and deploys more of its capital towards high-growth Asian economies. The focus of this plan is China, where management has launched new retail banking products such as credit cards, expanded its insurance and asset management capabilities and opened overseas desks to lend to Chinese businesses taking part in the government’s massive One Belt One Road infrastructure programme.

In 2017, net loans to Asian customers rose 20% to $426bn, which helped increase revenue from the region by 15% to $25.9bn. This cemented the region’s status as the most important contributor to group profits and this trend should continue as the bank slims down in smaller markets and refocuses capital towards Asia.

This trend is not only setting the stage for future growth as HSBC leverages its roots in the region to piggyback on fast-growing economies, but is also helping to increase profits in the short term. In 2017, statutory return on equity (ROE) rose from 0.8% to 5.9% year-on-year and represents a major step forward in management’s target of ROE in excess of 10% in the medium term.

This looks eminently achievable and would make the bank one of the healthiest of its peers with huge shareholder returns and a stable capital position. While HSBC may be a riskier bet than the likes of Lloyds due to its international presence, I think this represents a source of fantastic long-term growth that UK investors would do well to consider adding to their portfolio.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »