In January, one of the best performing FTSE 100 stocks was HSBC (LSE:HSBA). The HSBC share price moved 18% higher and is currently trading at levels not seen since early 2020. It’s also up 40% in a year. There are a few reasons for the bump higher last month, with some of them indicating to me that further gains for 2022 could be had for shareholders.
Interest rates set to rise
The main reason for the rally in the share price was rising interest rate expectations. HSBC is a global bank, and so generates revenue in a variety of countries and currencies. With a few exceptions, most developed nations are considering raising interest rates in the coming months.
For example, here in the UK, the rate hiking process has already begun. The first hike was in December, with the Bank of England expected to increase rates by another 0.25% today. In the US, the Federal Reserve has also indicated that it’s going to increase rates several times this year.
For HSBC, this is good news. On the one hand, it means that rates it can charge on loans and other liabilities can increase. For deposits, it’ll have to increase the rates paid to customers a bit as well. But overall, the difference between the two (known as the net interest margin), will increase. This allows the bank to increase profitability over time.
Although this was a key driver for moving the HSBC share price higher in January, I don’t think this move is over yet. I think that central banks could continue to raise rates even late in the year and into 2023. This could support further gains in the share price.
Higher dividends going forward on HSBC shares?
Another reason for the move upwards was speculation around higher dividend payments for this year. The latest results from November highlighted an increase in the common equity tier 1 (CET1) capital ratio. The more elevated this is, the more solvent the bank is judged to be.
On top of solvency, the bank also reiterated that “we now expect to move to within our target dividend payout ratio range of 40% to 55% of reported earnings per ordinary share”.
So if the bank is more profitable due to rate hikes this year, then it stands to reason that the dividend can also increase. Given the target dividend payout ratio, the jump higher in dividend per share could be substantial.
The current yield is 3%, so any move higher will attract income investors. I think some have already started to buy in at the start of this year, as people look where they want to allocate their money for 2022. Hence January was a good month for the HSBC share price.
Looking ahead, the next key event for the share price will be the Bank of England meeting tomorrow.
