Shares of HSBC Holdings (LSE: HSBA) fell 3% in early trade on Friday. That's after the bank's first-quarter figures showed adjusted pre-tax profit fell by 3% to $6.03bn during the period.
However, there was some good news. Shareholders will be rewarded with a $2bn buyback this year. And chief executive John Flint says that profits only fell because of "targeted spending" on growth.
So is the HSBC share price a buy? Here, I'll give my view on Friday's quarterly figures and explain why I'm bullish about the outlook for this £145bn business.
A strong set of figures
It's been a long time coming for investors in banking stocks. But rising interest rates and strong balance sheets mean that banks are now starting to deliver real growth.
HSBC saw its revenue rise by 6% to $13.7bn during the first quarter. Rising interest rates boosted profit margins on deposits, while customer balances also increased. Lending rose and the group's investment banking division delivered a stable performance.
As usual, the bank's Hong Kong-based Asian operations delivered the vast majority of profit. Adjusted pre-tax profit from Asia rose by 8.5% to $4,756m, compared to the same period last year. This was more than 10 times as much as the $438m quarterly profit generated by the next highest-performing region, North America.
Operating costs rose during the quarter, narrowing the bank's profit margins. But this spending has been focused on business growth and upgrades to online services. Looking ahead, Flint says that he expects to deliver "positive jaws for 2018" -- that's banking jargon for improved profit margins.
$2bn shareholder return
HSBC's share price has been boosted over the last two years by $5.5bn of share buybacks. These helped to support earnings per share and will cut the cost of future dividends. But they were also a sign that the bank was generating more surplus capital than it could profitably invest.
In Friday's first-quarter results, Flint announced plans for a $2bn share buyback in 2018. But he said that "in the light of the growth opportunities we see", this will probably be the only buyback this year.
This is good news, in my view. While buybacks have their place, companies can't grow sustainably simply by shrinking their share count. A new focus on growth should help to support long-term shareholder returns.
Is the price right?
HSBC's share price has risen by about 60% over the last two years. This strong growth has left the stock trading just below its book value, which I've estimated at about 720p per share from Friday's quarterly figures.
If we look at earnings and dividends, we can see the stock is trading on a 2018 forecast P/E of about 13.5, with a prospective dividend yield of 5.3%.
All of these figures seem very affordable to me. I believe that if profits continue to rise in line with forecasts, the shares are soon likely to start trading at a premium to book value. A return to January's 798p high seems quite possible to me.
For investors looking for a long-term dividend income, I think HSBC is attractively valued. I'd rate the stock as a buy.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.