HSBC Holdings (HSBC) is a British multinational bank and financial services holding company. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Earnings & Asset Quality
The banking giant reported a 76% jump in pre-tax profits in its Q3 earnings report earlier this week, signaling operational efficiency as revenue had only risen by 0.7% year-over-year.
HSBC has high-quality assets, with its tier 1 capital risk ratio of 15.9% comfortably exceeding its required threshold of 4.5%. This means that its assets are likely to generate predictable returns for the foreseeable future, which is beneficial to investors.
Looking forward, I expect the firm to benefit from rising interest rates which will allow it to earn higher spreads on its originated loans and debt investments.
HSBC earns 53% of its revenue from interest-bearing operations, and it’s self-explanatory that the bank’s revenue will benefit as a consequence of a strengthening debt market.
Shareholder Value
HSBC has decided to repurchase up to $2 billion of its shares. The effect of the repurchase is a higher intrinsic value to investors, which could push up the stock price.
According to the company: “Given the strong capital position and notwithstanding growth opportunities available to us, we intend to initiate a share buyback of up to $2 billion, which we expect to commence shortly.”
Key metrics suggest that HSBC already provides good shareholder value.
Diluted EPS, which is a measurement of net income relative to shares outstanding and exercised options, has grown by approximately 185% since January 2020. The share price of a stock often converges with diluted EPS, and I anticipate it to be the case for HSBC moving forward.
Technical Levels
The stock is trading above its 10, 50, 100, and 200-day moving averages, indicating that it’s a possible momentum opportunity. I expect momentum to run into 2022 due to systemic tailwinds, such as interest rate and bond-yield appreciation.
Wall Street’s Take
Turning to Wall Street, HSBC has a Moderate Buy consensus rating, based on two Buys assigned in the past three months.
Jason Napier of UBS is the latest analyst to have provided a consensus on HSBC stock. Napier thinks the stock is a buying opportunity due to the rising interest rate factor.
According to Napier: “Now, however, at current levels and given the outlook, we think HSBC represents favorable risk-reward driven by a number of key factors, which individually would be material and combined make for a compelling case in our view.”
Concluding Thoughts
HSBC’s shareholder compensation plan should give rise to the stock’s intrinsic value, especially as earnings are anticipated to increase due to a strengthening debt market. The company doesn’t pay a dividend, which makes it a cyclical capital gains pure-play.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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