This FTSE 100 banking stock looks very cheap compared to the index

When I look at the average price-to-earnings (P/E) ratio of the FTSE 100, it sits at 16.4. I can use this as a benchmark to then try and find good stocks that could be considered cheap in relation to the rest of the index. Given that I have a positive outlook for the banking sector right now, I spotted a share that seems to tick both boxes.

Why the bank’s done well

I’m talking about HSBC (LSE:HSBA). The global banking giant has enjoyed a 56% share price rally over the past year, posting fresh 52-week highs last week. Despite this surge, the corresponding bump in earnings per share means the P/E ratio’s 11.15 is well above the index average.

Let’s start by running through why the bank’s performed so well over the last year. One factor has been a repricing of expectations from investors when it comes to interest rates. If we rewind a year, many were expecting sharp and fast rate reductions from developed markets, including the US and UK. Yet given the move higher in inflation, along with concerns around tariff impacts, several central bank committees decided to slow the pace of interest rate reductions.

This meant the net interest margin for HSBC stayed higher than expected. For example, it was 1.56% for the second quarter of 2025 and 1.57% for H1 2025. In relation to H1 2024, it was only 0.05% lower, which was better than people expected.

Another factor has been the financial performance in all key divisions. The H1 report mentioned “each of our four businesses sustained momentum in their earnings with each growing revenue”. This clearly impressed investors that HSBC isn’t relying on just one area to carry the company. This diversified revenue base makes it an attractive prospect.

Valuation now versus the future

As we currently stand, I think the company looks good value versus the broader FTSE 100. What this means is that I believe the share price could keep rallying even though it’s already gained a lot. I expect the earnings per share to keep pace with the stock’s growth over the coming year, which could keep the P/E ratio from overheating.

Earnings growth could come from several areas. For example, the global markets division is benefiting from higher volatility in the stock market. Given the current geopolitical outlook, I believe this volatility will persist for some time. This could act to keep revenue high. Further, demand for wealth management services in Asia helped the bank in recent quarters. Again, I don’t see this as a short-term factor, but rather a long-term source of revenue for HSBC.

Of course, there are risks to factor in. It looks like the US is going to speed up the pace of rate cuts over the coming year if the economy starts to materially weaken. This could hurt the bank’s net interest margin. Another risk is a slow economic recovery in China, a market where HSBC has larger exposure than some of its peers.

Even with these risks, I think the bank offers good value right now and could be considered by investors.