HSBC's share price shows it could be the best banking stock around

After a rocky few years, things are finally looking up for global mega bank HSBC (LSE: HSBA). The company is once again profitable on a statutory level, it has exited several non-core markets to focus on its profitable Asian base and its shareholders are already receiving huge dividend payments.

Healthy at last 

And these characteristics together with the company's current share price make me think it's one of the best banking stocks on offer for UK investors. This is because at exactly 1 times book value, its share price bakes in little to no growth, which I think is a mistake.

In fact in 2017, the bank's adjusted revenue rose 5% to $51.5bn as each of its three main business lines performed well during the year. Even more impressive was the group's bottom line performance as cutting costs, exiting underperforming markets and rising interest rates helped boost adjusted pre-tax profits by 11% to $21bn.

Increased profits kept the bank's year-end tier 1 capital ratio at 14.5%, well above regulatory minimums and enough to once again pay out $10.2bn in dividends of $0.51 per share. At its current share price, this means shareholders enjoy a 5.65% yield from their quarterly dividend cheques. On top of this, management used its healthy balance sheet to buy back $3bn of its own shares with further buybacks likely on tap.

Investing in future growth  

Looking ahead, I see good reason for these shareholder returns to grow as management cuts costs assiduously and deploys more of its capital towards high-growth Asian economies. The focus of this plan is China, where management has launched new retail banking products such as credit cards, expanded its insurance and asset management capabilities and opened overseas desks to lend to Chinese businesses taking part in the government's massive One Belt One Road infrastructure programme.

In 2017, net loans to Asian customers rose 20% to $426bn, which helped increase revenue from the region by 15% to $25.9bn. This cemented the region's status as the most important contributor to group profits and this trend should continue as the bank slims down in smaller markets and refocuses capital towards Asia.

This trend is not only setting the stage for future growth as HSBC leverages its roots in the region to piggyback on fast-growing economies, but is also helping to increase profits in the short term. In 2017, statutory return on equity (ROE) rose from 0.8% to 5.9% year-on-year and represents a major step forward in management's target of ROE in excess of 10% in the medium term.

This looks eminently achievable and would make the bank one of the healthiest of its peers with huge shareholder returns and a stable capital position. While HSBC may be a riskier bet than the likes of Lloyds due to its international presence, I think this represents a source of fantastic long-term growth that UK investors would do well to consider adding to their portfolio.

Capital Gains

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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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