Is HSBC Holdings plc's 50% rally set to continue after Q1 results?

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HSBC, Paris

Despite all of the turbulence which has taken place in the stock market in the last year, the share price of HSBC(LSE: HSBA) has risen by over 50%. That's clearly an exceptionally impressive performance during a period where the FTSE 100 has risen by a rather lowly 19% in comparison. Looking ahead, could more growth be on the horizon for HSBC following its first quarter results?

Improving performance

While HSBC may be a global banking major, its financial performance in recent years has been rather disappointing. The company's cost base in particular has been a source of difficulties. Operating costs have risen to record levels and at times it has seemed as though the bank has become too big to deliver the changes required to improve profitability.

Thursday's results, however, show that the bank is making steady progress with its turnaround strategy. It has grown adjusted profit before tax by 12% when compared to the same quarter of the previous year, while its common equity tier 1 (CET1) ratio has increased by 70 basis points. It now stands at 14.3%, which suggests that it could perform relatively well in difficult trading conditions.

Since its turnaround plan began, HSBC has been able to record annualised run-rate savings of $4.3bn, while also conducting a $1bn share buyback and investing in a range of areas aimed at promoting future growth. As such, it appears as though clear progress is being made.

Upbeat outlook

Looking ahead, HSBC shares could continue to deliver impressive capital gains. The company is expected to report a rise in earnings of 6% next year, which shows its financial performance is set to improve after three years of disappointment. This puts it on a forward price-to-earnings (P/E) ratio of only 14, which suggests it could be subject to a further upward re-rating if more progress can be made on reducing its cost base.

As well as upside potential, HSBC offers a relatively sound income return. It currently yields 6.1% from a dividend which is covered 1.2 times by profit. With inflation moving higher, it could therefore become increasingly in demand among income-seeking investors.

Sector potential

Of course, other stocks within the financial services industry could also deliver FTSE 100-beating capital gains. Secure Trust Bank(LSE: STB) is forecast to post a rise in earnings of 7% this year, followed by further growth of 35% next year. This means it has a forward P/E ratio of 12.2. While this suggests it may offer better value for money than HSBC, its larger peer offers superior diversification and may perform better in a period where uncertainty surrounding Brexit looks set to build.

Nevertheless, Secure Trust Bank offers a yield of 3.2% from a dividend which is covered 1.9 times by profit. Therefore, its shares are likely to become more popular as the threat from inflation rises. Both stocks could make strong gains in future, but with a better risk/reward ratio, HSBC seems to be the star long-term buy.

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Peter Stephens owns shares of HSBC Holdings. 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.