Interactive Investor

This FTSE 100 bank share could be worth 50% more

13th June 2023 13:16

by Graeme Evans from interactive investor

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It’s already outperforming rivals but there are plenty of catalysts ready to make this massive bank even bigger. Graeme Evans explains how.

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Shares in a “catalyst rich” HSBC Holdings (LSE:HSBA) have been backed to go 53% higher as this year’s pacesetter among UK-listed lenders lines up further buybacks and special dividends.

Supportive Asian wealth markets and an anticipated recovery in corporate loan growth in 2024 also underpin the “buy” recommendation and new 930p target of Jefferies analysts.

The FTSE 100-listed stock has already surged by more than 35% since October and is comfortably the best performing of London’s five major listed banks over the past year.

Its year-to-date improvement of 17% also puts it ahead of the 8% seen for the Stoxx Europe 600 Banks index, in which HSBC is the largest constituent.

Some of the upturn reflects exposure to the re-opening of the Hong Kong border, with Jefferies highlighting a 222% surge in new-to-bank account openings by international Chinese customers in the first quarter of 2023 compared with the pandemic level in 2019.

More generally, Jefferies believes January’s lifting of Covid restrictions and connections through China’s Greater Bay Area offer a “buoyant backdrop” for HSBC in Hong Kong.

Management is guiding towards net interest income of at least $34 billion in 2023, but Jefferies is materially above this at $36 billion. For 2025, its models point to a figure of $37.3 billion based on expectations for a pick-up in loan growth.

The other major catalyst is the potential for buybacks and special dividends after Jefferies today raised its estimate for capital returns by 10%. It now expects HSBC to distribute the equivalent of 42% of its current market value between this year and 2025.

After a $2 billion buyback was announced at first quarter results, Jefferies notes that $812 million had been completed in the first month to suggest that management will make good on its commitment to deliver the programme over three months.

The City firm expects a $2 billion reload with second quarter results on 1 August and for the plan to continue in 2024 with $8 billion of shares bought during the year.

In addition, the planned sale of the bank's Canada business in the first quarter of next year is set to result in the payment of a $0.21 cents a share special dividend.

Jefferies said: “We expect these catalysts to create scope for greater investor appreciation of TBV (tangible book value)/share growth and return potential.”

It adds that the capital repatriation and return on equity improvement may do much to appease the bank's largest shareholder's calls for a split-up of the group.

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