The first quarter of the current financial year was a difficult one for HSBC (LSE: HSBA). The high degree of volatility which was present in world markets was a leading contributor to an 18% fall in the bank’s adjusted profit before tax. Clearly, this result is somewhat disappointing, but with HSBC’s shares being flat today, the market seems to have responded in a rather muted manner to what was a challenging quarter for the global banking giant.
A reason for this could be that HSBC is on track to meets its cost reduction target by the end of 2017. This will see operating costs (which recently hit record highs) trimmed back so as to potentially improve profitability. And while HSBC seems to have ditched efforts to freeze staff salaries, it’s still expected to make a number of redundancies over the medium term which could have a positive impact on its bottom line.
Furthermore, HSBC is on target to meet its risk-weighted asset reduction target and with a common equity tier 1 (CET1) ratio of 11.9%, it seems to be in a relatively strong financial position. This is enhanced by the bank’s diversified operations and global presence, with the volatility and uncertainty witnessed during the first quarter of the year being cushioned somewhat by HSBC’s varied business model.
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Dividend cut ahead… or not?
With HSBC yielding 7.8% at the present time, it appears as though the market is anticipating a cut to its dividend. However, the bank maintained dividends for the quarter at 10 cents per share and this should provide its investors with a degree of comfort regarding its future prospects as an income play. In fact, HSBC’s dividend is expected to be covered 1.2 times this year and while this doesn’t rule out a dividend cut, it does show that provided HSBC can meet its expectations, dividends should be more than adequately covered over the medium term.
On the topic of forecasts, HSBC is expected to post a fall in earnings of 5% this year, followed by growth in its bottom line of 8% next year. Clearly, this means that investor sentiment could fall in the short term, but with HSBC trading on a price-to-earnings (P/E) ratio of just 10.6, it seems to offer a relatively wide margin of safety. As such, its shares may be supported by a low valuation and with growth due next year, investor sentiment could pick up – especially if HSBC is able to deliver on its ambitious cost-cutting strategy.
With HSBC set to benefit from demographic trends in global markets, notably the continued rise of the middle class in Asia and further economic growth in emerging markets, it seems to offer excellent long-term growth potential. Certainly, the first quarter of the current year was disappointing, but with a keen valuation and a diversified business model, HSBC seems to be a strong long-term buy.
