Over the last five years, shares in HSBC (LSE: HSBA) (NYSE: HSBC.US) have considerably underperformed the FTSE 100. In fact, they have fallen in value by 15% during the period, while the FTSE 100 is up 21%. That’s an underperformance of 36% which, for investors in the bank, is a very disappointing result.
However, looking ahead, HSBC could prove to be an excellent buy now, and it could outperform the FTSE 100. Here’s why.
Cost Control
While many of its banking sector peers have been able to rationalise, reduce costs and become more efficient, HSBC is struggling to keep its day-to-day expenses to a minimum. This, combined with disappointing top-line growth — which is mainly a result of slower than expected growth in Asia — has meant that the bank’s cost-income ratio was a rather disappointing 62.5% in the first nine months of 2014.
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However, looking ahead, HSBC is planning to streamline its operations and make a wide range of sustainable cost savings. Of course, these will take time to come through and improve the bank’s profitability, but even progress in the short term could be enough to stimulate investor sentiment and show that, even if the company’s top line is experiencing sluggish growth, its bottom line could post encouraging gains via improved cost control.
Valuation
Despite its vast diversity and exposure to some of the fastest growing markets in the world, HSBC still trades on an extremely low valuation. For example, it has a price to book (P/B) ratio of just 0.95 which, for a bank that required no government bailout in the credit crunch, and which is one of the major players in Asia and other markets where banking services have huge long term potential, seems unjustifiably low. As a result, HSBC could see its share price move considerably higher over the medium term.
Looking Ahead
At least partly due to its disappointing share price performance in recent years, HSBC now yields a very enticing 5.5%. However, due to a combination of increased earnings and a higher payout ratio that are forecast for the next two years, it could be yielding as much as 6.3% next year.
That’s a truly staggering forward yield for such a high quality stock and, when combined with a low valuation, excellent diversity and a renewed focus on cost control, could cause investor sentiment to sharply increase during the course of this year.
As a result, HSBC could put the disappointment of the last five years well and truly behind it and beat the FTSE 100 in 2015.
