Why I'd still buy HSBC Holdings plc after profits rise 41%

Pre-tax profits at Anglo-Asian bank HSBC Holdings (LSE: HSBA) have risen by 41% so far this year, according to figures released on Monday. The bank's third-quarter results show that it made a pre-tax profit of £14.9bn during the first nine months of 2017, compared to £10.6bn for the same period last year.

Of course, these were statutory figures. These include one-off factors and exchange rate differences. When adjusting items are stripped out, the underlying pre-tax profit for the nine months to 30 September was £17.4bn, just 8% higher than for the same period last year.

It's not too late to buy

Today's figures suggest that HSBC is well on the road to recovery. Given that the shares have risen by 19% to 738p over the last year, you may think that it's too late to buy shares in this dividend heavyweight.

I'm not sure that this view is correct. I believe this turnaround story could have a lot further to run. Indeed, the stock still looks quite affordable to me, on several key measures.

One of these is HSBC's return on average shareholders' equity, which is currently running at 8.2%. This isn't high by historical standards. Indeed, new chairman Mark Tucker is said to have told investors that he believes the growth rate and return on equity should be higher than they are currently.

Mr Tucker appears to believe that the bank's assets can be made to work harder. If he's correct, then the stock's modest price/book value of about 1.2 may be too low.

In any case, today's figures look reassuring to me. The bank's Common Equity Tier One (CET1) ratio remains strong at 14.6%. Total lending rose by 2.8% during the third quarter, while the number of customer accounts rose by 2%.

In my view, these shares offer a safe 5% dividend yield, along with a decent chance of long-term growth.

A potential alternative

If you're looking for a dividend stock with exposure to Asia but don't want to invest in a bank, one potential alternative is Standard Life Aberdeen (LSE: SLA).

This recently-merged firm has combined Standard Life's UK-focused businesses with the stronger growth remit of Aberdeen Asset Management's emerging market fund business.

In theory, I believe that this combination should produce a more diverse, low-cost business, with more consistent growth. In reality, it's still too soon to be sure.

One initial stumbling block is said to be that some major institutional investors have been reluctant to commit all of the funds previously held by two firms to a single company. According to press reports, this has contributed to the group seeing $10bn of mutual fund withdrawals this year.

I expect that customers will become more confident if the firm's early performance lives up to its promise.

We'll find out more in February, when the combined group's first full-year results are expected. Standard Life Aberdeen is expected to deliver adjusted earnings of 28.7p per share this year, with a dividend of 21.6p per share.

These figures give a forecast P/E of 15, with a prospective yield of 4.9%. In my view, this could be a decent entry point for income investors. I'm holding onto my shares.

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Roland Head owns shares of Standard Life Aberdeen. The Motley Fool UK has recommended HSBC Holdings and Standard Life Aberdeen. 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.

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