Why HSBC shares are worth 46% more than current price

They've been one of the most popular UK bank stocks this year, but one analyst thinks there's much more to come. 

The promise of bumper dividends and buybacks continues to fire up interest in HSBC Holdings (LSE:HSBA) as a leading City firm today forecast 46% upside for the shares to 900p.

Analysts at Jefferies believe that the Asia-focused lender has the potential to return up to 40% of its current market capitalisation in the period up to 2025.

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The upgrade comes two months after the US bank declared London-listed HSBC as one of its top picks in the European banking sector, with a price target of 770p.

Since that note, HSBC has published annual results in which it pleased the City by revealing that it will consider a new cycle of share buybacks alongside May’s first quarter results.

The bank will also revert to paying quarterly dividends, part of wider plans for a payout ratio of 50% of reported earnings per share for 2023 and 2024.

In addition, the sale of HSBC’s Canada business to RBC is due to complete later this year and  result in a special dividend of $0.21 a share for payment in the early part of 2024.

Shares have risen more than 15% this year, with this afternoon’s level of 625p close to the highest point since 2019 as investors also eye exposure to a potential Chinese economic post-pandemic recovery.

In today’s note headed “a short runway to a long flight of buybacks”, Jefferies said its expectations for total capital returns in 2023-25 were 41% ahead of consensus.

This is based on first quarter results on 2 May including a $2.5 billion buyback in order to bring the bank’s capital buffer towards the midpoint of HSBC’s 14%-14.5% target range.

A further $2.5 billion is expected at the half-year stage before $5 billion at the year-end. Having just seen HSBC declare a dividend of 32 cents equating to a 2022 pay-out ratio of 44%, Jefferies is looking for a total of 79 cents in 2023 to leave the shares on a yield of 10.6%.

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Its projections for earnings in 2023 and 2024 have increased by 4% and 6% respectively, driven by a revenue boost from trading related non-interest income. The firm’s new earnings forecasts now average 17% above the City’s 2023-25 consensus.

In its January note, Jefferies called HSBC “catalyst rich” due to the relaxation of Covid restrictions in China and Hong Kong where 36% of group assets are located.

It said: “We expect a re-opened economy to drive higher loan demand and general activity which should benefit HSBC. Hong Kong and mainland China have modestly higher net interest margins for the group, so a pick-up in loan growth in these regions should be accretive.”