If you include dividend payments, the banks total return is positive but is still lags that of the FTSE 100 over the same period the FTSE 100 has gained 27% excluding dividends since the end of 2009.
These figures give the impression that HSBC is a poor investment. The question is, will this performance continue and what will it take to push HSBCs share price higher?
There are several catalysts that could drive HSBCs share price higher. Firstly, the banks valuation. At present levels, HSBC trades at a forward P/E of 11.3, which is significantly below the banks sector average of 25.2. That being said, HSBCs larger international peers, such asCitigroupandJPMorgantrade at forward P/Es of 10.0 and 10.1 respectively. So, compared to international peers, HSBC looks overvalued.
Nevertheless, City analysts believe that the banks pre-tax profit is set to expand at a mid-single-digit rate for the next few years, which is a steady rate of growth worth paying for.
Additionally, over the long term, HSBC is set to benefit from global economic growth. HSBCs management and the banks analysts believe that by 2050, the worlds top 30 economies those in Asia-Pacific, Latin America, the Middle East and Africa will have grown four-fold. With around 7,400 offices in over 60 countries and territories, HSBCs global footprint means that it is better positioned than many of its peers to profit fromglobal economic growth.
Unfortunately, while HSBC does have plenty of opportunities, there are also plenty of factors that threaten the companys growth.
The largest threat facing HSBCs growth is regulation. Fines, capital requirements andcompliance costs are all proving to be a drag on HSBCs growth.
For example, as one of the worlds largest and most systematically important banks, HSBC has been repeatedly targeted by regulators who are seeking to improve the stability of the banking system. This is, on the whole, a good thing. Few want a repeat of the 2008/09 financial crisis. However, the more capital HSBC is forced to retain on its balance sheet, the less capital it is able to deploy and invest.
And even though HSBCs capital cushion currently stands above regulatory requirements the groups core tier 1 ratio stood at 11.2% at the end of the third quarter theres now talk that regulators may force banks to hold even more capital.New rules could force banks to set aside capital reserves worth 15-20% of the banks assets. A far bigger cushion than is currently required.
As well as increasingly strict capital rules, HSBC continues to be hit by fines for mistakes made by the bank in the past. At the beginning of November, the bank admitted thatit could face new fines and costs for its alleged role in banking scandals of more than $1.8bn, or 1.1bn with more expected to follow. Less than two weeks after this announcement, aBelgian prosecutor accusedHSBC of money laundering, France accused the bank of helping clients avoid tax andArgentina made the same accusation.
This tidal wave of fines and lawsuits is terrible news for HSBC. The banks compliance costs are now spiralling out of control, undoing years of careful cost cutting.
Operating expenses jumped by 15% during the third quarter and the banks pre-tax profit margin fell from 29.9% to 29.2% year on year, which may not seem like much, but this cost the bank around $100m.
The bottom line
Overall, in the long term, HSBC should profit from global economic growth. However, regulatory headwinds are likely to strangle the banks near-term growth, which will continue to weigh on the share price.
But don’t just take my word on it,I strongly advise that you take a closer look at HSBC before you make any trading decision.
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Rupert Hargreaves has no position in any shares mentioned. 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.