Back on 16 December 2021, the Bank of England committee decided to raise interest rates from 0.1% to 0.25%. This sparked the start of a sharp rise in the base rate, now sitting at 5.25%. As a global bank, HSBC (LSE:HSBA) shares benefitted from this spike in higher rates. So what if I’d invested just as the party was starting?
Talking through the numbers
Back at the opening bell on the Thursday morning before the central bank met, HSBC shares sat at 438p. Fast forward to today and the share price is 593p. This is a 35% jump. So my £1,000 would be worth around £1,350 at the moment.
When I consider this is a period of just over two years, it’s a very respectable return. Over the same period, the FTSE 100 is up a rather measly 4%. So when I compare the performance of the bank to the broader index, it certainly has outperformed.
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But what about if I’d decided to buy a rival bank instead? One of the most popular retail banking stocks is Lloyds Banking Group. If I’d bought its shares instead, my £1,000 would be worth £973! That’s correct, I’d actually be losing money.
The perks of rising rates
The main reason why HSBC has rallied over this period is due to the benefits of higher interest rates. At any quarterly report, the management team will refer to net interest income. This is the money made from the net interest margin, the difference between the interest paid on deposits versus what it charges on loans.
The higher the base rate, the larger this margin becomes. So HSBC profits have swelled over the past couple of years by the increase in the rate. The profit after tax jumped from £14.69bn in 2021 to £16.67bn in 2022. We’ll shortly get the 2023 report.
Thoughts for the future
I can’t change the past and unfortunately I didn’t buy HSBC stock in December 2021. When I look at the outlook for interest rates going forward, I don’t see this as a pillar of support anymore.
The broad expectation is for major central banks to start cutting rates from this spring onwards. This is thanks to lower inflation around the world. As a result, I don’t see net interest income increasing in the same way as it did over the course of 2022 and 2023 for HSBC.
Of course, the share price is influenced by more factors than just that one. The bank makes money from servicing corporates, institutional and private clients. It recently launched Zing, a new FinTech app for foreign exchange.
Therefore, I still believe the share price can appreciate in value. But I doubt it’ll be the same as we saw over the period in question.
