How high could HSBC shares go due to rising interest rates?

Jon Smith takes out the key points from the latest results and explains why HSBC shares could continue to rally with higher interest rates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Front view photo of a woman using digital tablet in London

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Growth Shares

Investing Articles

Is the Rolls-Royce share price still undervalued in 2025?

After massive growth in the Rolls-Royce share price, Charlie Carman considers whether the FTSE 100 aerospace and defence stock is…

Read more »

Growth Shares

Prediction: I think £1,000 invested in this UK stock could double by 2030

Jon Smith runs through a FTSE 250 stock with a market cap just over £1bn that he feels has the…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Barclays’ share price is down 7% from March, so is now the right time for me to buy?

Barclays’ share price has dipped recently, which could mean a bargain to be had. I took a deep dive into…

Read more »

Investing Articles

Down 13% since March, does this rising FTSE 250 defence star look an unmissable buy for me?

The FTSE 250 is currently home to many of the big stock stars of tomorrow and I think this high-tech…

Read more »

Investing Articles

Should I buy Aston Martin shares for my ISA while they’re under 70p?

With Aston Martin's shares down hugely across multiple time frames, this writer is wondering if he should snap up some…

Read more »

Investing Articles

Forget gold! I prefer UK shares for trying to build long-term wealth

Stock market volatility has sent investors running to safe-haven assets. But for building wealth over time, Stephen Wright prefers UK…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Growth Shares

340p? A top bank has just put out a new forecast for the Barclays share price

Jon Smith reveals the latest analyst target for the Barclays share price but explains why he's still not convinced about…

Read more »