HSBC (LSE: HSBA) shares have outperformed the broader banking sector in 2023. Year to date, the stock is actually up, while the likes of Barclays and NatWest are down.
Are shares in the FTSE 100 banking behemoth worth buying today? Let’s discuss.
Three reasons to buy
Looking at HSBC from an investment perspective today, there are a number of reasons to be optimistic.
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For starters, the company has a solid strategy in place. Recently, HSBC has been making moves to diversify its operations and shift capital towards higher-growth areas such as Asia and wealth management.
It has also been cutting costs, exiting non-core businesses, and making significant investments in technology (it recently bought Silicon Valley Bank’s UK arm). I think it’s on the right track here. This strategy positions it well for the years ahead.
Secondly, the company is doing quite well at the moment due to higher interest rates. For the first quarter of 2023, HSBC posted a pre-tax profit of $12.9bn versus $4.2bn a year earlier. This was well ahead of forecasts. Analysts had been expecting a profit of around $8.6bn.
On the back of this strong quarter, the bank announced its first quarterly dividend since 2019 ($0.10 per share). It also advised that it intends to initiate a share buyback of up to $2bn in the near future.
Meanwhile, looking ahead, management said that it expects to have “substantial future distribution capacity” for dividends and share buybacks.
Our strong first quarter performance provides further evidence that our strategy is working. Our profits were spread across our major geographies, and all three global businesses performed well as we continued to meet our customers’ needs through our internationally connected franchises.
HSBC CEO Noel Quinn
Another attraction is the yield here. Currently, analysts expect HSBC to pay out a total of 57 cents in dividends this year. At today’s share price and exchange rate, that equates to a yield of a healthy 7.6%.
Finally, the shares remain quite inexpensive from a valuation perspective. Currently, HSBC has a price-to-earnings ratio of 6.3 and a price-to-book ratio of 0.9. At those metrics, there’s room for a valuation re-rating to the upside.
Risks to consider
On the downside, there’s some uncertainty here due to the weak global economy.
HSBC’s Q1 expected credit losses and other credit impairment charges (ECL) were “relatively benign” at $0.4bn. This figure was down $0.2bn on the figure posted a year earlier.
However, if economic conditions continue to weaken, the bank could see a higher level of loan defaults. It noted in its Q1 results that it continues to monitor risks related to its exposure to mainland China’s commercial real estate sector.
Another risk – which I always highlight when discussing traditional banks – is the threat of FinTech. The banking industry is being disrupted right now by digital banks, payments firms, and other innovative FinTech start-ups. This adds uncertainty from a long-term investment point of view.
My view
Weighing everything up, my view is that HSBC shares are potentially worth buying today.
However, given the risks here, I think investors should look at buying other shares too, for diversification.
