HSBC (LSE:HSBA) makes a lot of money from Greater China. More than two thirds of its pre-tax profits came from Hong Kong in 2020. Last year, mainland China also contributed around $2.6bn in adjusted profit before tax too. As a result, the HSBC share price depends a lot on Greater China’s economic conditions.
While Greater China is the key profit centre for the bank now, India could be a huge one in the future. According to many estimates, India will have a population greater than Greater China’s at some point. Given India’s economic importance and growth potential, here’s more on HSBC’s India operations and why I think the bank at the current HSBC share price is a buy.
HSBC India
Given that it has so many international branches, HSBC offers a range of solutions and products to help Indian companies do business internationally. Given its presence in India, HSBC also helps many international business do business there. And they really do want to do business there. For international companies, India is attractive given its rising incomes, population of more than 1.3 billion, and its English-speaking population. For so many companies, Indian GDP growth will be a huge trend for decades to come.
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HSBC’s recent results in India have shown improvement with the increasing adoption of mobile banking helping. In 2020, for instance, it reported a profit before tax in its India business of $1.024bn, up 1.78% year-on-year, despite the pandemic. Total revenue from the local business rose an even stronger 17%. As a result of the India performance last year, the country was the third-largest pre-tax profit centre for HSBC (after Hong Kong and mainland China).
For the future, I believe management’s investments in fintech and potential M&A could help with the bank’s growth in the region. Many Indians now have mobile phones, giving HSBC a much larger potential market if the bank successfully uses its technology to service that market. The country is also ripe for consolidation. With HSBC’s huge resources, the company could afford to buy shares of local banks with attractive growth prospects. Although India is a huge country, many leading Indian banks still have market caps smaller than that of leading Western banks. That would make purchasing big stakes in Indian banks easier.
The HSBC share price: what I’d do
HSBC faces some headwinds. Currently the bank has to contend with the ultra-low-interest-rate environment, which has lowered interest rate-related income. And the continued effects of the coronavirus outbreak have caused loan losses. Management has also made some bad M&A deals before that have destroyed value.
Nevertheless, given the price-to-book ratio of around 0.72 and the expected economic recovery following Covid-19 vaccine rollouts, I’m optimistic on the shares.
I’m especially optimistic about HSBC’s long-term future in India. While it doesn’t account for a large percentage of the bank’s total pre-tax profits today, the country could account for substantially more if management makes the right moves. I’d buy and hold.
