On Tuesday morning (1 August), HSBC (LSE:HSBA) released results for the first half of the year. And HSBC shares rallied, putting the gain over the past year at 27%. This is an impressive figure, well above the FTSE 100 average over this period. In large part, rising interest rates have helped to boost profits. So if it’s true that the interest rate in the UK could hit 6% early next year, how high could the stock go?
Looking at the latest results
For H1 2023, profit before tax rose by $12.9bn to $21.7bn versus the same period last year. Revenue increased by a similar amount, a jump of $12.3bn to $36.9bn. The report highlighted that this “was driven by higher net interest income in all of our global businesses due to interest rate rises”.
This is interesting, as it’s not just in the UK where the bank is benefiting. Around the world, most developed economies have sharply increased rates over the past year. So the benefit of being a global bank means that HSBC can enjoy the surge across all divisions. This makes it an appealing top banking share.
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A final point to note in this regard is the net interest margin (NIM). It stands at 1.7%, up from 1.24% at the same time last year. The NIM is the difference between the rate paid on client deposits versus what’s charged on loans. For example, it could be paying 1% on deposits and charging 2.7% on loans to have a NIM of 1.7%.
Translating higher rates into profit
Clearly, the bank is enjoying the NIM, with the share price strongly correlated to this. Over the past year, profit before tax has risen by 146%. The NIM has jumped by 37%. So the 27% move in the share price does lag some of these metrics.
Looking ahead, I think the very best case scenario over the next year would be for HSBC shares to rally another 27%. Why would they? Well, if profits jump by another 146%, then we could see the share price rise by a similar amount to the past year. Yet it’s going to be hard to achieve this, as the benchmark for profit is higher. The 146% jump amounted to $12.9bn, but if the same percentage increase happens in the next year, it would need to be a whopping $31.7bn.
By contrast, the NIM could continue to move higher. If UK rates do hit 6%, I don’t think it improbable to see the NIM jump further over the next year. Yet I don’t believe this will be enough to boost overall profits by a huge amount.
My base case scenario
It’s important to remember that a share price factors in investors current and future opinions. So I think that some of the good news for HSBC from higher rates next year is already factored in to the current price.
I do think that the stock should rally over the next year, but I struggle to see it matching the run over the past year.
