HSBC’s yawning discount is too harsh

Shape shifting. Noel Quinn has unleashed a virtuous cycle at HSBC. Annual results released on Wednesday show the $155 billion global bank he leads is delivering consistently strong returns and that its investments are driving growth and helping it to ride geopolitical waves. His next challenge is to convince the market to recognise the lender’s success.

Emerging markets dealt the bank some painful blows during the final three months of the year. In China, HSBC took a hefty $3 billion impairment on its 19% stake in Bank of Communications, where it has been an investor for some two decades. Its Argentina business lost more than $500 million before tax thanks to hyperinflation. Overall profit before tax was $30.3 billion, up 78% year-on-year but short of analyst estimates.

Nonetheless, Quinn hit his target for a mid-teens return on tangible equity, notching a final result for the year of 14.6%, or 15.6% excluding one-off items. He’s maintaining the same target for 2024, too, despite signs that the high interest rate party is over.

The goal seems reasonable. All else being equal, the bank would add another three-quarters of a percentage point to ROTE this year if it matches the $7 billion of share buybacks it did in 2023 – the highest stock repurchase since 2008. It has already announced a $2 billion buyback for the first quarter, and its chunky sale in Canada will soon close, creating room to potentially return even more to shareholders than last year.

What’s particularly encouraging is HSBC’s diversification in Asia. The region accounts for half of total profit before tax. Pain in its core Hong Kong market, and in mainland China, is partly offset by growth in other Asian territories; these now account for 25% of the region’s profit before tax, up from 13% in 2019. India – where the bank held two board meetings during 2023 – and Singapore are shining the brightest, with each market logging more than $1 billion of pre-tax profit during 2023.

HSBC, the world’s biggest trade bank, is capturing the benefits of shifting supply chains, something all multinationals are trying to do. But the market is reluctant to give Quinn full credit for the pivot.

The bank has been delivering superior shareholder returns since at least January last year. Assuming a 15% ROTE is sustainable, its stock ought to trade closer to 1.5 times its one-year forward tangible book value, assuming a 10% cost of equity; instead it is around 0.9 times. This yawning gap is larger than at top global peers including Singapore’s DBS, Citigroup and JPMorgan, though Standard Chartered does fare worse. Convincing the market to cheer may be Quinn’s hardest task.