HSBCthe company’s (LSE: HSBA) share price is down 7% from its May 8 12-month high of £7.24. This makes it look like an even bigger opportunity to me than before.

On the key price-to-earnings (P/E) ratio, HSBC’s share price is currently at 7.2. This is the lowest result in its peer group, which has an average P/E ratio of 8.4. Therefore, the price of this product is significantly lower.

To translate this into difficult cash terms, I performed a comprehensive discounted cash flow analysis using data from other analysts and my own.

This shows that HSBC shares are currently 59% undervalued at their current price of £6.75. So the fair value would be £16.46.

Given the unpredictability of the market, they can of course go lower or higher. However, it highlights how bargain-basement HSBC shares are right now.

What does the core business look like?

The key risk for HSBC is declines in net interest income (NII). It is the difference between the interest income a bank earns from lending and the interest it pays to depositors.

This is likely as the Bank of England will continue to cut interest rates following the 0.25% cut on August 1.

However, the company’s ongoing strategic transformation involves greater investment in fee income businesses such as its international retail and wealth (IRW) business.

The strategic review for the first half of 2024 showed that net novel assets invested in IRW’s business increased from $53 billion in 2020 to more than $84 billion today.

During the same period, it achieved gross profit of more than $1 billion in each of three additional markets outside the United Kingdom and Hong Kong. These are mainland China, Singapore and India.

Overall, reported revenues increased 1% in the first half of the year compared to the first half of 2023, to $37.3 billion. Meanwhile, pre-tax profit fell by less than 0.5% to $21.556 billion.

Given these numbers, HSBC forecasts NII will enhance by approximately $43 billion this year. This is up from the previous forecast of $41 billion.

Moreover, analyst consensus estimates that by the end of 2026 the return on equity will be 12.5%.

Bonus for high performance

In my opinion, these numbers should provide good support for the share price. However, for me, the real value of the stock is its high dividend yield.

It paid a total dividend of 61 cents in 2023, set at the sterling equivalent of 49 pence. At the current share price, that’s 7.3%.

So £10,000 invested in shares would yield £730 in dividends for the first year. After 10 years, on the same basis, this amount would of course enhance to £7,300 and after 30 years to £21,900.

However, purchasing more HSBC shares with the dividend paid would significantly enhance these profits.

This way the dividend will be £10,705 at the same average rate of return after 10 years, rather than £7,300. And after 30 years, on the same basis, the amount would have increased to £78,761, not £21,900.

Taking into account the initial investment of £10,000, the whole holding company would generate a dividend of £5,750 a year!

I must note that there is no assurance that such payouts will continue at this level. They may decline or be cut if the business situation deteriorates.

That said, analysts forecast profitability to rise to 9.5% this year.

Therefore, I will be buying more HSBC shares soon.