Movement in the HSBC (LSE:HSBA) share price following the bank’s Q3 2023 results has been fairly muted in early trading. A new $3bn share buyback programme, and a target dividend payout ratio of 50% for this year and next were particularly juicy highlights for potential investors to digest.
However, soaring costs might have put a spanner in the works for HSBC shares. As a result, the lender missed the consensus City forecast for quarterly pre-tax profit growth. So, is the banking stock a cheap buy now at under 600p? Or should potential investors consider avoiding the shares instead?
Here’s my take.
Growth trajectory
The HSBC share price has performed well recently, rising 13% this year to date and 34% on a 12-month basis. It has significantly outpaced the FTSE 100 index over those timeframes.
However, long-term shareholders are no strangers to disappointment. The stock’s down 7% on where it was five years ago.
HSBC delivered $7.7bn in pre-tax profit during the quarter. On the face of it, this figure compares very favourably to the $3.2bn posted in the same period a year earlier. A 235% jump is certainly an eye-catching improvement!
Yet, the group missed the consensus broker forecast of $8.1bn, which could present a challenge to further share price growth. After all, the bank was widely expected to perform well in Q3 due to the positive impact of rising interest rates.
Nonetheless, CEO Noel Quinn said he’s hopeful the results will be welcomed by Ping An Insurance Group. This could finally mark the removal of a longstanding thorn in HSBC’s side considering the major Chinese shareholder previously waged a campaign to split the bank’s UK and Asian operations, against the board’s wishes.
Overall, I think there’s enough in the headline news to keep prospective investors interested, especially with a new share buyback that was $1bn higher than expectations and robust forward dividend cover of two times earnings.
Valuation
A quick glance across a range of valuation metrics shows that HSBC shares look a little more expensive than the shares of major FTSE 100 competitors.
| Metric | Barclays | HSBC | Lloyds | NatWest |
|---|---|---|---|---|
| P/E ratio | 3.74 | 6.17 | 5.18 | 3.87 |
| P/B ratio | 0.35 | 0.92 | 0.56 | 0.51 |
In order to keep the valuation attractive, a range of initiatives to secure efficiency savings are now a key priority. One potential cause for concern investors should note is the 5% rise in costs the bank anticipates this year, excluding its acquisition of Silicon Valley Bank UK.
A cheap stock to buy?
HSBC seems to have navigated recent challenges, such as rising mortgage rates and sluggish housing market activity in developed markets, better than many lenders. Crucially, its 1.7% net interest margin (an important profitability measure) beat expectations of 1.68%.
However, there were some flies in the ointment in HSBC’s Q3 earnings. In addition, the bank is particularly exposed to China’s ailing economy. The possible liquidation of property development giant Evergrande Group is a significant cloud looming on the horizon.
That said, improvement across several metrics and a solid dividend outlook are enough to compensate for the risks in my view. If I had spare cash, I’d buy HSBC shares today. I believe they merit consideration for investors seeking banking sector exposure in their portfolios.
