What's holding back HSBC shares?
6th August 2018 10:48
by Richard Hunter from interactive investor
Despite the banking giant’s "reassuringly generous" dividend yield, HSBC shares remain on the sidelines. Richard Hunter, head of markets at interactive investor, weighs up today's results.
"Changes are afoot at the banking behemoth HSBC Holdings, although by definition this will be a strategic marathon rather than a sprint.
HSBC's extremely cash generative nature is enabling reinvestment into the business on a grand scale. Across the piece the slant is towards digital and, by geography, China is a particular focus. This makes clear strategic sense, since over this latest period Asia accounted for nearly 90% of pre-tax profit for the group as a whole.
In the meantime, there are other positives as the bank begins to realise this potential. As has become expected, the balance sheet is robust and a capital cushion of over 14% underlines this strength.
Elsewhere, there were strong showings from the Hong Kong wealth management business and progress within the UK mortgage market, whilst in terms of key metrics higher revenues, low credit impairments and currency tailwinds all contributed to a higher net profit than the equivalent prior year period.
From an investment viewpoint, the projected dividend yield of 5.4% is reassuringly generous and the previously announced share buyback programme stands in support of the price.
There are higher levels of concern which are not specific to HSBC, such as the ongoing cost of regulation and the uncertainties which surround the mysterious Brexit negotiations.
This is quite apart from the escalating trade tensions between the US and China, which could have clearly negative implications for the bank. The reinvestment into the business inevitably comes at a cost, as general expenses have spiked, whilst the return on equity figure is still shy of HSBC's previously announced target of 10%.
As with most of its UK competitors, the share price has been something of a laggard, having dipped 6% over the last year, as compared to a 2% hike for the wider FTSE 100.
To be fair, the price over the last two years has risen 42%, which could be more indicative of the general direction of travel. The general view towards HSBC is one of an interested onlooker rather than a participant, and comes in at a hold, albeit a strong one."
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