Will HSBC Holdings plc Ever Return To 1,000p?

During 2006, at the height of the pre-financial crisis boom,HSBCs(LSE: HSBA) (NYSE: HSBC.US) shares hit 1,000p, a level not seen since the dotcom bubble.

However, since then the banks shares have stayed below 800p, even though HSBC is now in better shape than it was when the financial crisis set in. The question is, will HSBCs shares ever return to 1,000p, or will they languish below 800p for the rest of the decade?

Strong recovery

HSBC has made one of the strongest recoveries in the banking sector after the financial crisis.

Luckily the bank, which does a large part of its business within Asia, escaped the majority of the crisis, although the widespread carnage caused by the crisis did impact HSBCs balance sheet. The bank undertook a 12.5bn rights issue during 2009 in order to bolster its balance sheet andavoidany further cash calls.

HSBC is now prudently managing its capital position and the banks core tier 1 capital ratio financial cushion is one of the best in the industry, standing at 11.3%, up from 10.8% as reported at the end of 2013. This capital position is only likely to get stronger. HSBC generated profits of $12.3bn during the first half of this year, making HSBC one of the worlds most profitable businesses on a dollar basis.

Further, HSBCs pre-tax profits have rapidly reboundedover the past five years, growing 218% since 2009. However, the banks growth is now about to slow.

Struggling for growth

Most of the HSBCs earnings growth since the financial crisis has come as a result of cost cutting, rather than sales growth. According to my figures since 2009 HSBCs operating income has dropped from 41.8bn, down to 40.8bn as the bank shrinks its balance sheet and pulls out of risky markets.

Still, cost cutting has provided meaningful earnings growth. Since taking the position three years ago, Chief Executive Stuart Gulliver has sold or closed around 60 of HSBCsbusinesses. Additionally, 40,000 jobs have been axed and costs have been slashed. Over $5bn was wiped of HSBCs operating cost bill during 2013 alone.

But now HSBC is struggling to cut costs, in fact costs are rising, as the bank struggles with an ever increasing amount of regulation and legal paperwork. Indeed,management has estimated that the bank will spend $750m to $800m thisyear on its compliance and risk programme, an increase of around 25% on last years figure.

Costs are expected to increase by a similar amount again next year and of course, these costs exclude one-off charges. Within the last few days HSBC has estimated that the UK rules forcing banks to ring-fence retail and institutional banking activities will cost the group approximately 2bn.

Unfortunately, these rising costs are now threatening HSBCs growth as they start to eat away at profit margins. Rising compliance costs pushed HSBCs operating expenses up by a total of 4% to $18.2bn during the first half of this year.

As a result, the banks cost efficiency ratio ticked up to 58.6% from 55.3%, above managements targeted mid-50s level, erasing much of the cost cutting work done over the past three years or so.

The bottom line

All in all, HSBCs shares will struggle to move higher over the next few years, as costs rise and the bank finds it difficult to expand income. Than being said, for income seekers HSBC is a great pick as the bank currently supports a dividend yield of 4.9% and the payout is covered 1.7 time by earnings per share.

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.