Back during 2006, before the financial crisis had begun and when banks were still raking in the cash, the shares of global banking giant,HSBC(LSE: HSBA) hit a high of 1,000p and it seemed as if the banks growth was unstoppable.
However, nearly a decade later, HSBCs shares have failed to return to this multi-year high. The question is, will HSBCs shares ever return to 1,000p?
Theres really one key reason why HSBCs shares have struggled to move higher over the past five years crisis and thats a lack of growth. You see, HSBC has been restructuring its operations over the past few years, exiting businesses where the bank is exposed to an increased level of risk both financial and regulatory.
As HSBC has departed some markets, the banks revenue has taken a hit. Over the past five years the HSBCs revenue has actually fallen, despite the fact that the global economy has grown at a rate of around 3% per annum over the same period.
Nevertheless, it seems as if HSBC hasnt been chasing growth over this period,favouring higher profit margins instead. In particular, over the past five years, despite lacklustre revenue growth, HSBCs pre-tax profit margin has jumped from 9%, as reported at the end of 2009, to 29% as reported at the end of 2013.
For the most part, widening profit margins have come as a result of cost cutting. Indeed, since taking the position three years ago, Chief Executive Stuart Gulliver has sold or closed around 60 of HSBCs businesses, 40,000 jobs have been axed and over $5bn was wiped of HSBCs operating cost bill during 2013 alone.
But now HSBC is struggling to cut costs, as an ever increasing amount of regulatory and legal paperwork force the bank to hike spending at its compliance and riskmanagement division. Costs are now increasing at this division at a rate of around 25% per annum. Rising costs could put the brakes on HSBCs earnings growth, which has been powered by cost cutting.
At first glance HSBC currently looks to be undervalued in comparison to its peers. Specifically, HSBC currently trades at a forward P/E of 11.7, compared to the banks sector average of around 25.
However, when compared to its international peers, HSBC looks to be appropriately valued.Bank of AmericaandCitigroupfor example currently trade at forward P/Es of 11.6 and 10respectively. Both of these international bankingbehemothsare currently facing the sameregulatory pressures as HSBC.
Going to struggle
All in all, it seems as if HSBCs shares are going to struggle to move higher in the near-term. The banks earnings are coming under pressure as costs rise, revenue growth is stagnating and at present, HSBC trades at a valuation similar to that of its international peers.
Still, while HSBC will find it hard to grow in the near-term, the bank should be able to achieve steady growth over the long-term as trade flows between emerging economies grow. For example,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.
Four-fold growth in economic output will almost certainly lead to a boost in businesses for HSBC and the bank is better positioned than many of its peers to profit from this growth.
With around7,400offices in over60countries and territories,HSBCs global footprint makes it one of the few global banks that can negotiate international trade deals internally, without getting involved with third parties.
A long-term play?
If you feel that HSBC is a great company with bright prospects over the long-term, then it’s up to you whether or not the bank deserves a place within your portfolio. However,before youbefore you make any trading decision I strongly advise that you take a closer look.
To help you conduct your own analysis, our analysts here at the Motley Fool have put together thisfree reportentitled,”The Motley Fool’s Guide To Banking“.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.