Since the start of 2023, HSBC (LSE:HSBA) shares have risen 16%. So a £1,000 investment at the beginning of the year would be worth around £1,160 today. That’s a healthy return and it would have been complemented by a handsome dividend — the yield currently sits around 4.3%.
While interest rate pressures have engendered fluctuations in the market in 2023, the biggest volatility trigger was the collapse of Silicon Valley Bank in March. HSBC was one of the biggest UK-based fallers during the correction, along with Standard Chartered and Barclays. At its nadir, the bank was down over 20%.
Beating its peers
Despite the correction in March, HSBC has outperformed other major UK banks since the start of the year. And there are several reasons for this.
HSBC is more diversified that other UK banks, with investment operations and a shifting focus towards Asia — a high growth market. As banks are cyclical, operating in a high-growth market tends to have a net positive impact. Around two-thirds of its profits are generated in Asia, with China contributing 44% of the bank’s profit in 2022.
As Berenberg noted in a recent update, while HSBC’s position provides “the bank with access to faster-growing markets, HSBC’s global presence means it is well placed to provide high-returning transaction banking services for global corporates”.
As a result, HSBC is less impacted by the concerns we’re seeing in the UK as interest rates extend beyond levels seen before in my lifetime. Elevated interest rates have a positive impact of net interest revenue, but the rates we’re seeing today are likely to induce more customer defaults.
Valuation
In the first quarter of 2023, it posted a pre-tax profit of $12.9bn versus $4.2bn a year earlier. This came in well ahead of forecasts — analysts had been expecting a profit of around $8.6bn.
As a result, the bank now trades with a price-to-earnings (P/E) of 6.9 times. That’s based on performance over the past 12 months. Despite the average P/E for the FTSE 100 being around double that, it’s still one of the more expensive banks.
However, this marginally higher P/E reflects the bank’s better prospects — based on its shift to Asia. A discounted cash flow model suggests HSBC could be undervalued by as much as 43%. That’s a margin of safety even super-investor Warren Buffett would appreciate.
What’s next?
HSBC has been under pressure from shareholder Ping An to split the Asia business from its slower growing European and US businesses. This was rejected by shareholders last month on the company’s advice, but it could remain a concern in the coming years.
Despite this, I see it as a stock to buy and hold for the long run — that’s what I’ve done. In the near term, valuation metrics suggest they’re room for re-valuation towards the upside. And in the long run, it’s a well-run, highly-capitalised bank operating in a fast-growing market. Over the next decade, I’m expecting it to continue outperforming.
