Times have been tough for investors in HSBC (LSE: HSBA) (NYSE: HSBC.US), with share price growth of less than 2% in the last five years. That compares to 50% for the FTSE 100 as a whole. HSBC's share price has been sliding again in recent months, and in a strange way that gladdens my heart, because every day it looks more and more like a strong buy to me.
An ugly 7% fall in Q2 group revenues to $34.37 billion and troubles in China are largely to blame for the share price slump. But there has been better news lately, with a 30% increase in Q3 pre-tax profits to $4.53 billion. Management is upbeat, hailing evidence of a broadening recovery and stabilising growth in mainland China, which should support Hong Kong and the rest of Asia-Pacific. That's good news for HSBC, which generates roughly half its underlying profits from Hong Kong and its home UK market (where it also expects positive growth, in contrast to eurozone underperformance).
HSBC has been successfully cutting expenses, posting annualised sustainable savings of $4.5 billion since 2011. Underlying revenue is now growing 9% faster than costs. It is one of the most strongly capitalised banks of all, with its Core Tier 1 ratio recently increasing from 12.7% to 13.3%. Its dividend policy is progressive and the yield is a healthy 4.2%, outgunning the banking sector average of 3.7%.
Rumours that HSBC is planning to sell off a 30% stake in its UK retail banking arm -- in protest at regulatory restrictions and moves to force lenders to ringfence their investment and retail operations -- appear to have been scotched, and I'm happy to hear that. With Santander UK, TSB, the Co-op Bank and OneSavings Bank already offering IPOs, and the government still to offload its stake in Lloyds and RBS, HSBC might struggle to generate a decent valuation in any sell-off. Anyway, management doesn't need the distraction right now.
Running banks will remain frustrating, as regulators continue to slap five-lever mortice deadlocks on every stable door, years after the financial crisis bolted. But that doesn't stop them pumping out billions in profits. HSBC is making good progress in selling off its non-core businesses, which should help to simplify its structure. Its earnings per share (EPS) have been growing strongly, rising 22% from $0.58 to $0.71 in the nine months to 30 September.
With forecast EPS growth of 8% next year, the outlook for 2014 is promising. By next December, that yield is forecast to have hit 5.4%. Buying into that now is certainly tempting, especially with Lloyds and RBS yet to yield a bean. Better still, you can buy on a forward valuation of 10.3 times earnings. Yes, HSBC's share price has been on a downward trend. But every time it slips a notch lower, the case for buying the bank with correspondingly higher. Next year, you may kick yourself for missing this opportunity.
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> Harvey owns shares in RBS. He doesn't own any other company mentioned in this article