HSBC (LSE: HSBA) shares havefallen by 1% in 2016. Not a lot, but itbrings its total decline to 23% over the last five years and its hardly a positive when you consider that the FTSE 100 has risen by 11% during the same time period.
However, HSBCs share price performance masks the great opportunity thatcurrently presents itself to one of the worlds biggest banks. Certainly, its operating costs have spiralled and need to be reined-in, while it needs to become more efficient, leaner and more profitable. However, with a strategy to do just that over the coming years, HSBC is in the midst of a major change thatcould spark a sharp rise in its valuation over the medium-to-long term.
As well as internal changes, its well-placed to respond positively to external changes. As a truly global bank, HSBC offers a degree of geographic diversity few of its index peers can match. And with the outlook for the UK and European economies in particular being decidedly uncertain, this relative stability and resilience could prove to be a major ally over the coming months and years.
Growth opportunities
However, HSBC isnt so well spread as to miss out on growth opportunities. Its extremely well-positioned in China and across the emerging world. Therefore, it has the potential to benefit from the rise in size and wealth of the middle class in such places. Theyre likely to demand greater amounts of credit in future as consumer goods become a more significant proportion of emerging economies. This provides opportunities for HSBC in terms of lending, but also in other financial products such as savings and investment.
Such opportunities should allow HSBC to deliver an improved earnings growth rate in the long run. However, HSBC is expected to record a fall in earnings of 15% in the current year, although this is expected to be changenext year with growth of 6% pencilled-in by the market.
While disappointing, this years expectations leave HSBCs dividend covered 1.2 times by profit. This indicates that although there may be limited scope for brisk dividend rises over the near term, HSBCs dividend appears sustainable given its current outlook. And with a yield of 7.5%, there are few blue chip stocks thatcan compete in terms of income return at the present time.
As well as growth potential and a high income return, HSBC also offers significant upward rerating potential. It trades on a price-to-earnings (P/E) ratio of just 11. Given its long-term outlook, diverse operations and sound strategy, such a low valuation is difficult to justify and it indicates that whilebeing unpopular among investors, HSBC offers a wide margin of safety.
As such, further downside may be somewhat limited, while HSBCs upside prospects are very bright. Therefore, it appears to be one of the best investment opportunities around right now.
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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
