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While the FTSE 100 flirts with new highs, HSBC (LSE:HSBA) shares aren’t faring nearly as well on Thursday (9 October). At £10 per share, the index’s biggest bank has slumped 6% after planned M&A action in Hong Kong failed to inspire investors.
The company will spend $13.6bn to take full control of Hang Seng Bank, it says. The move supports its strategy of expanding in Hong Kong, which it identifies as a key growth market.
HSBC’s share price is still up an impressive 28% in the year to date. I’m wondering if today’s pullback represents an attractive dip-buying opportunity for investors to consider.
Shrewd move…
HSBC has long signalled that it sees its future in Asia. Recent asset sales in North America, Europe and Africa have expedited its changing geographic strategy, and boosted its investment capabilities in its high-performing Asian markets.
Today’s announcement doesn’t come as a surprise, then. Looking at Hong Kong specifically, HSBC says “it is best positioned to [grow] by strengthening the Hong Kong banking presence of both HSBC Asia Pacific and Hang Seng Bank.”
The bank’s also says it’s identified “an opportunity to create greater alignment across HSBC and Hang Seng Bank that may result in better operational leverage and efficiencies.”
… but at a price
The move itself makes good sense, then. But things get stickier when one considers what HSBC is paying to make the deal happen. The cost is huge.
Steve Clayton, analyst and head of equity funds at Hargreaves Lansdown, notes that “gaining control of Hang Seng comes at a premium, with HSBC offering to pay almost 30% above the previous market value of the listed minority shares… prompting some investors to argue that the deal will be dilutive to the group’s returns.”
HSBC will pay HK$155 per share for Hang Seng’s outstanding shares. That’s well above the closing price of $HK119 yesterday.
To add to investor unease, HSBC says it will halt buybacks of its own shares for the next three quarters to finance the deal. It hopes that stopping repurchases will bring its CET1 capital ratio back up to the target range of 14% to 14.5%.
Is HSBC a buy?
As a holder of HSBC shares myself, I can understand why the market has a dim view of the Hang Seng deal. In the short term, it’s easy to see why investors feel the move erodes shareholder value.
However, I haven’t been tempted to sell any or all of my own shares. I buy stocks to hold for the long haul. And my view of the FTSE 100 bank — as well as the eventual benefits of the Hang Seng takeover — remains upbeat over this sort of time horizon.
The outlook for HSBC remains clouded by tough economic conditions in China. However, over the long term things remain extremely promising as Asia experiences significant population growth and soaring income levels. Expansion in the region gives the bank additional scope to seize this opportunity.
HSBC’s share price drop today leaves it with a price-to-earnings (P/E) ratio of 11.1 times. Given the bank’s exceptional growth potential, I think this represents an attractive dip-buying opportunity to consider.
