Shares in the last six months HSBC (LSE: HSBA), one of the largest banks in the world, fell 11% excluding dividends.

This performance is disappointing, mainly because the bank is currently looking behind the broader FTSE 100. Over the same period, the UK's leading stock index, excluding distributions to investors, fell only 5%.

The difference in performance is even greater from year to day. Since the beginning of 2018, HSBC shares have fallen short of the FTSE 100 by 8.8%.

However, one of the most attractive qualities of HSBC is its dividend income. Today, the stock supports a dividend yield of 6.4%, making it one of the most attractive income stocks on the market. Adding distributions to investors, however, only marginally improves the underperformance. Since the beginning of the year, including dividends, HSBC has outperformed the FTSE 100 by 7.8%.

What's happening?

It seems that there are several reasons why HSBC has lagged behind the broader market this year.

First, we have Trump's trade war with China, HSBC's largest market. There are already signs that this war has an impact on Chinese economic growth, although policymakers have been quick to try to cushion the decline.

Second, it seems to me that investors have sold the stock because of their higher valuation compared to the rest of the UK banking sector. At the beginning of 2018, the stock changed hands for around 14.3x the forward price, a premium that was more than 50% above the rest of the UK financial sector. The valuation of HSBC weakened slightly today. The shares are currently changing hands for 10.8x forward gains – still a premium for listed UK companies with a median PER of 8.5.

Although this comparison makes HSBC seem expensive compared to the rest of the industry, I believe that the banking group earns many times the premium because of its international exposure. What is the premium but? This question is difficult to answer. In the US, comparable companies trade at an average forward P / E of around 12. In China, the shares of the largest banks in the country now change between six and eight times.

Placement of the shares

I think a rating between 11x and 12x future earnings could be more appropriate for HSBC. While the bank has a large part of its business in China, other businesses in the UK and US account for a significant portion of the result. In addition, the group's globally integrated company is worth a premium as many of its HSBC counterparts failed to gain a foothold in Asia.

City analysts forecast earnings per share of 0.76 or 58 pence for 2019. On this basis, a PER of 12 would justify a stock price of around 700 pence. Including the dividend yield of 6.4% of the Group, this means that investors are offered an increase of 14.1% over the medium term.

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Rupert Hargreaves has no mentioned share. The Motley Fool UK has recommended HSBC Holdings. The companies mentioned in this article are based on the author's views and may therefore differ from the official recommendations we make in our subscription services such as Stock Advisers, Hidden Winners and Pro. We at The Motley Fool believe that taking into account different insights makes us better investors.



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